Tentamen Concepts Flashcards
What is Pareto efficiency?
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).
What is an Edgeworth box, and how do you interpret it?
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.
What is a Contract Curve?
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.
When is the Barter Equilibrium reached?
There’s no trade for which both parties are better of, thus no trade will occur.
What is a General Equilibrium?
The price of a good is s.t. aggregate demand and aggregate supply match up.
What is Walras’ Law?
It says that the value of aggregate excess demand will always be zero at any set of positive prices.
What is the 1st fundemental theorem of Welfare Economics?
(see image)
What is the 2nd fundemental theorem of Welfare Economics?
What is Brouwers Fixed Point Theorem?
What is Expected Utility Theory?
It claims that we should expect people to do whatever has the best expected value.
What is the Reduction Axiom?
It means that the common things in two lotteries should be irrelevant.
What is the Independence Axiom?
It means that when we remove the common part from two lotteries, peoples preferences won’t change.
What is the Expected Utility function?
The function that gets the expected utility
What is prospect theory?
People tend to make decisions based on their reference point. Using prospect theory we apply the value function v, and the weight function w.
What are people in the gains domain and in the loss domain?
gains: risk averse (losses loom greater then gains, a.k.a. loss aversion)
losses: risk loving
How do people generally look at probabilities?
They generally underweight large probabilities, and overweight small probabilities.
What is Ellsberg Urn?
An urn without known content (i.e. 30 red balls, 60 green or blue balls).
What is the Ellsberg Paradox?
People tend to prefer known probabilities, i.e. ambiguity aversion.
What is maxmin utility?
People tend to maximize the subjective expected utility, with the worst case in mind.
What is a Pure Nash Equilibrium?
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.
What is a Mixed Nash Equilibrium?
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.
What is level-k reasoning?
Where you optimize your strategy for someone thinking level k - 1
What is the Logit model for Inference?
A model where you calculate the probability of someone taking a certain action
What is the Quantal Resonse Equilibrium?
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.
What is a game in extensive form?
What is a decision node in an extensive game?
A position at which a player takes a decision, only one player at the time.
What is perfect information?
All the player know all the information relevant to the game
What are the Critical Assumptions of Games in Extensive Form?
What is a Value Function in an extensive game, and how its value calculated?
It returns the value of a certain node, this is the probability of something happening times its value.
What is the BAckward Induction Equilibruim?
You start backwards calculating values, and then move to the front.
What are the critical assumptions of backwards induction?
What is a credible thread?
It tests wheter the oppenent can actually do whatever they claim they could do.
What is a Quantal Response Backward Induction Equilibruim?
It’s similar as the regual Backward Equilibrium however it uses the Quantal probabilities.
What is a subgame?
A game that is part of the actual (larger) game
What is the definition of a subgame perfect equilibrium?
“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.”
What is Stackelberg’s Model of Market Leadership?
A model in which it seems that there’s a market leader and followers.
