Unit 4 - Social Interactions

Question 1

Strategic interactions

Answer 1

Situations in which there are two or more people, and the actions taken by each person affects both their own outcome and other people’s outcomes

Question 2

Social dilemmas

Answer 2

• Occur when people do not take adequate account of the effects of their decisions on others

Question 3

The invisible hand game

Answer 3

• A situation in which two players have to determine the division of labour, whether or not they will specialise - by taking into account the effect of their decision and the other player’s decision
• Example from book - Anil and Bala

Question 4

Best response

Answer 4

• Gives the player the highest payoff, given the strategies the other players select

Question 5

Dominant strategy

Answer 5

• Provides the highest payoff for one player, regardless of what the other does

Question 6

Dominant strategy equilibrium

Answer 6

The outcome when both players play their dominant strategy
- the decision is not based on what the other does, but on what the payoff is
- the players pursue their self-interest

Question 7

Social preferences

Answer 7

• when people generally do not only care about what happens to themselves, but also what happens to others - based on altruism

Question 8

Altruistic preferences as Indifference curves

Answer 8

when completely selfish - IC is vertical - it shifts vertically as they increase their own payoff without considering the other player’s payoff

when somewhat altruist - IC is downward sloping - 1st player derives utility from the 2nd player having a payoff as well - their well-being is impacted by their consideration for the other person

Question 9

Public good

Answer 9

When one individual bears a cost to provide the good and everyone benefits from the provision of the good

Question 10

Free riding issue

Answer 10

Assuming others will choose their dominant strategy, one relies on the actions of other to reap the benefit of the outcome without making any sacrifice themselves
- outcome of the provision of public goods

Question 11

Cooperative outcomes

Answer 11

• they occur when parties participate in a common project in a way that mutual benefits occur
• cooperative outcomes can arise in the invisible hand game, in prisoner’s dilemma and the public goods game

Question 12

The Ultimatum Game

Answer 12

• how much the subjects win depends on how the others play the game
• sequential game
• it is about sharing the economic rents that arise in an interaction

Question 13

Nash equilibrium

Answer 13

• Arises if everyone is playing their best response to the strategies of everyone else
• Gives a prediction of what we should observe - that all players do the best they can given what others are doing
• There may be multiple nash equilibria