Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Microeconomics SEM 2 > Game Theory > Flashcards

Game Theory Flashcards

1
Q

What is Game Theory?

A

Study of how People Behave in Strategic Situations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is a Strategic Situation?

A

Where each Decision-maker must Consider how others will respond to its actions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the 5 components of a Game?

A 
Players
Strategies
Payoffs
Timing
An Equilibrium concept
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the Players?

A

Parties who make Decisions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are Strategies?

A

Range of decisions the Players can Make

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are Payoffs?

A

Each Player is Motivated by what they will Gain from the Outcome

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is Timing?

A

Who can do what, when?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is an Equilibrium Concept?

A

What kind of Outcome will be looked for

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is a Nash Equilibrium?

A

Where no Player can change their Equilibrium Strategy + Receive a Higher Payoff

  • No force acting for change- No Player wants to Deviate from their Equilibrium
  • No Player regrets Strategy Decision
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Under a Nash equilibrium, where can there ALWAYS be Equilibrium?

A

Dominant Strategies Equilibrium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the 3 main reasons we Observe Cooperation?

A
  1. Different Games
  2. Repeat Play of Games
  3. Lack of Information
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Why might Different Games lead to Cooperation?

A

Game may not be a Prisoner’s Dilemma style

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How can Repeat Play of Games lead to Cooperation?

A

More games allows Players to learn about each other + develop Trust
-Allows to threaten punishment for cheating

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How can Lack of Information lead to Cooperation?

A

Players may not know Numbers in Payoff Matrix

–> More Inclined to Cooperate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does Cournot Quantity Competition model?

A

Models Strategic Interactions between few firms using Rev./Cost/Demand Curves

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are the Total Costs of Firms?

A 
TCi = cqi
i = different firms
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What are the Marginal Costs of each firm?

A

MC1 = MC2 = c

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What are the 3 assumptions of firms?

A

Each produce Homogenous Goods
Produce quantities qi
Firms are Symmetrical

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

if there are 2 firms, what is the Profit Function of firm 1?

A

Prof. 1 = P(Q)q1 - cq1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Derive the FOC of the Profit Function. given that Market Demand = a - bQ

A

Q = q1 + q2 ==> P = a - b(q1 + q2)
Prof. 1 = P(Q)q1 - cq1
==> [a - b(q1 + q2)]q1 - cq1
FOC (dProf/dq1): a - b(q1 + q2) - b(1 + dq2/dq1)q1 - c = 0

21
Q

What doe dq2/dq1 show?

A

How Firm 1 thinks Firm 2’s choice of q2 will respond to Firm 1’s choice of q1

22
Q

What is the Cournot Conjecture + what is it assumed to be + what does it mean?

A

dq2/dq1 = 0
Firm 1 assumes Firm 2 will NOT adjust q2 in response to Firm 1’s choice of q1
–> Each firm chooses Output assuming others will NOT change their Output

23
Q

Derive Firm 1’s Reaction Function from the FOC, given Cournot’s Conjecture

A

FOC: a - b(q1 + q2) - bq1 - c = 0

q1 = (a - bq2 - c)/2b ==> (a-c)/2b - q2/2

24
Q

What does the Reaction Function show?

A

Shows Best Value of q1 in response to a given q2

25
Q

If a Increases, what happens to q1?

A

Increased a = Increased Demand

q1 Increases

26
Q

If c Increases, what happens to q1?

A

Increased c = Increased MC

q1 Decreases

27
Q

If q2 Increases, what happens to q1?

A

Q = q1 + q2

q1 Decreases to keep Price high

28
Q

If b Increases, what happens to q1?

A

Increased b = Demand becomes Steeper- Increased P from Lower q1
q1 Decreases

29
Q

What would Firm 2’s Reaction Function be and why?

A

q2 = (a - bq1 - c)/2b

Due to Symmetry

30
Q

Where would the Nash equilibrium be for the 2 firms?

A

Where the 2 firms’ Reaction Functions Intersect

31
Q

How do you solve for the Cournot Nash equilibrium?

A

Solve Simultaneous Equations of Reaction Functions
solve by Symmetry or substitution
q1nc = q2nc

32
Q

Given the firms’ Reaction Function to be (a - bq - c)/2b, what would be q1nc and q2nc- the Cournot Nash equilibrium?

A

q1nc = (a - bq2 - c)/2b = (a - bq1 - c)/2b = q2nc

==> q1nc = (a-c)/3b = q2nc by Symmetry

33
Q

How would an Increase in Demand (a) affect the Reaction Functions?

A

Both Reaction Functions would shift to the Right by Increase in a
Increased Demand–> Output more Profitable–> Increased Output

34
Q

How would a Decrease in Firm 1’s MC (c) affect the Reaction Functions?

A

Firm 1’s Reaction Function shifts to the Right by Decrease in c
Firm 1 now more Cost Competitive than Firm 2–> Gains larger Market Share

35
Q

For N Symmetric firms, what is the Profit Function and its FOC?

A

Profit i = P(Q)qi - cqi

FOC: P + qi(dP/dQ)(dQ/dqi) - c = 0

36
Q

For N Symmetric firms, what is MR and MC?

A 
MR = P + qi(dP/dQ)(dQ/dqi)
MC = cqi
37
Q

For N Symmetric firms, what is the Cournot Conjecture?

A

dQ/dqi = 1

38
Q

By Symmetry, for N Symmetric firms, what is qi?

A

qi = Q/N

39
Q

For N Symmetric firms, using the Cournot Conjecture + qi, what is the equation for MR = MC?

A

P + (Q/N)(dP/dQ) = c
==> P [1 + (1/N) (Q/P) (dP/dQ)] = c
=> P [1 + (1/Ne)] = c
e = PeD

40
Q

Given P [1 + (1/Ne)] = c, what happens to the Outcome as N tends to 1?

A

Monopoly Outcome- P > c

41
Q

Given P [1 + (1/Ne)] = c, what happens to the Outcome as N tends to Infinity?

A

Perfectly Competitive Outcome- P = c

42
Q

Given P [1 + (1/Ne)] = c, what happens to the Outcome as e tends to Infinity?

A

Perfectly Competitive Outcome- P = c

43
Q

Given P [1 + (1/Ne)] = c, what happens to the Outcome as N Increases or e Decreases (towards Negative Infinity)?

A

P tends to c

44
Q

What is Stackelberg Quantity Leadership?

A

One Firm sets Output before others + can stick to it

  • Firm can Increase Profits as it can Influence Follower’s Output Decision
  • -> Leader can always choose Cournot NE if it wanted to
45
Q

What is Bertrand Price competition?

A

Firms Simultaneously choose PRICE not Output

- Firms can now Lose ALL Market Share- even if only 2 firms

46
Q

Explain Bertrand Price competition

A

Assume Duopoly: Homogenous Output, MC1 = MC2 = c, No Fixed Costs
If Firm 1 chooses P1 > c => Firm 2 can choose P2 where c < P2 < P1 - Firm 2 gains All Market Share + Profit

47
Q

In Bertrand Price competition, why can’t P2, where c < P2 < P1, be a Nash equilibrium?

A

Firm 1 would want to Deviate + set Price where c < P1 < P2

48
Q

Where is the only Nash equilibrium under Bertrand Price competition?

A

c = P1BN = P2BN

Outcome is Efficient- same as Perfectly Competitive outcome

Microeconomics SEM 2 (12 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions