Tentamen Concepts

Question 1

What is Pareto efficiency?

Answer 1

Something is Pareto efficient, iff. there is no Pareto improvement is available. (Pareto improvement: better or equal for everyone, and at least strictly better for one).

Question 2

What is an Edgeworth box, and how do you interpret it?

Answer 2

An Edgeworth box displays all the possible combinations of Barter that can happen in an Economy. In the image below can clearly the lines of indifference be seen, with CC the contract curve.

Question 3

What is a Contract Curve?

Answer 3

When a trade on the contract curve is reached no change will make any of the both parties better of, thus no further trades will take place.

Question 4

When is the Barter Equilibrium reached?

Answer 4

There’s no trade for which both parties are better of, thus no trade will occur.

Question 5

What is a General Equilibrium?

Answer 5

The price of a good is s.t. aggregate demand and aggregate supply match up.

Question 6

What is Walras’ Law?

Answer 6

It says that the value of aggregate excess demand will always be zero at any set of positive prices.

Question 7

What is the 1st fundemental theorem of Welfare Economics?

Answer 7

(see image)

Question 8

What is the 2nd fundemental theorem of Welfare Economics?

Answer 8

Question 9

What is Brouwers Fixed Point Theorem?

Answer 9

Question 10

What is Expected Utility Theory?

Answer 10

It claims that we should expect people to do whatever has the best expected value.

Question 11

What is the Reduction Axiom?

Answer 11

It means that the common things in two lotteries should be irrelevant.

Question 12

What is the Independence Axiom?

Answer 12

It means that when we remove the common part from two lotteries, peoples preferences won’t change.

Question 13

What is the Expected Utility function?

Answer 13

The function that gets the expected utility

Question 14

What is prospect theory?

Answer 14

People tend to make decisions based on their reference point. Using prospect theory we apply the value function v, and the weight function w.

Question 15

What are people in the gains domain and in the loss domain?

Answer 15

gains: risk averse (losses loom greater then gains, a.k.a. loss aversion)
losses: risk loving

Question 16

How do people generally look at probabilities?

Answer 16

They generally underweight large probabilities, and overweight small probabilities.

Question 17

What is Ellsberg Urn?

Answer 17

An urn without known content (i.e. 30 red balls, 60 green or blue balls).

Question 18

What is the Ellsberg Paradox?

Answer 18

People tend to prefer known probabilities, i.e. ambiguity aversion.

Question 19

What is maxmin utility?

Answer 19

People tend to maximize the subjective expected utility, with the worst case in mind.

Question 20

What is a Pure Nash Equilibrium?

Answer 20

When all players predict the same action profile of the game, and every maximizes its utility agains the prediction. This means that no player has a reason to go against.

Question 21

What is a Mixed Nash Equilibrium?

Answer 21

In some cases it could be bad to always choose the same choice, it might be valueable to randomly choose to become unpredictable, and thus gain an advantage.

Question 22

What is level-k reasoning?

Answer 22

Where you optimize your strategy for someone thinking level k - 1

Question 23

What is the Logit model for Inference?

Answer 23

A model where you calculate the probability of someone taking a certain action

Question 24

What is the Quantal Resonse Equilibrium?

Answer 24

You use the Logit model instead of the best action to estimate the best choice, when lambda inf then the Mixed Nash Equilibrium can be found.

Question 25

What is a game in extensive form?

Answer 25

Question 26

What is a decision node in an extensive game?

Answer 26

A position at which a player takes a decision, only one player at the time.

Question 27

What is perfect information?

Answer 27

All the player know all the information relevant to the game

Question 28

What are the Critical Assumptions of Games in Extensive Form?

Answer 28

Question 29

What is a Value Function in an extensive game, and how its value calculated?

Answer 29

It returns the value of a certain node, this is the probability of something happening times its value.

Question 30

What is the BAckward Induction Equilibruim?

Answer 30

You start backwards calculating values, and then move to the front.

Question 31

What are the critical assumptions of backwards induction?

Answer 31

Question 32

What is a credible thread?

Answer 32

It tests wheter the oppenent can actually do whatever they claim they could do.

Question 33

What is a Quantal Response Backward Induction Equilibruim?

Answer 33

It’s similar as the regual Backward Equilibrium however it uses the Quantal probabilities.

Question 34

What is a subgame?

Answer 34

A game that is part of the actual (larger) game

Question 35

What is the definition of a subgame perfect equilibrium?

Answer 35

“The definition of a subgame perfect equilibrium is that all players correctly predict the same strategy profile and that this profile induces a Nash equilibrium in every subgame of the game in extensive form.”

Question 36

What is Stackelberg’s Model of Market Leadership?

Answer 36

A model in which it seems that there’s a market leader and followers.