ECO 103 - Chapter 3 Notes
ECO 103 - Chapter 3 Notes Eco 103
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This 3 page Class Notes was uploaded by Shannon Surell on Sunday February 14, 2016. The Class Notes belongs to Eco 103 at Illinois State University taught by Amir Marmarchi in Spring 2016. Since its upload, it has received 18 views. For similar materials see Individuals and Social Choice in Economcs at Illinois State University.
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Date Created: 02/14/16
ECO 103 – Amir Marmarchi Chapter 3 – Game Theory Tuesday, February 2, 2016 Game theory: method of analyzing strategic interaction that occurs between small numbers of people, firms, organizations and even countries Strategic interaction: anticipating decisions others will make in response to your decision Mutual interdependence: outcome of game depends not only on what you do but on what other players do in response Assumptions - Economic rationality o Assess outcomes o Calculate strategy to outcomes (minimize worst possible outcome) o Choose optimal outcomes (players prefer higher payoff) Game Playing Decision making Mutual interdependence Little/no mutual interdependence Anticipate moves Committing to a course of action Choose strategy bas on moves of opponent Requires evaluation of alternatives, not your opponent Can be used to make a decision Economic model: structured and simplified version of reality used to explain the real-word - Game theory creating economic model for human behavior - Retains key features of larger scale Player: rational entity with preference Strategy: predetermined set of actions to take in response of other players actions (“what if’s) Information: amount of knowledge about strategy/actions Preferences: desired outcomes Outcomes: potential result Payoff: utility received from outcome Equilibrium: solution of a game Payoff matrix: table with numbers that summarize who the players are, actions available to each player and payoffs available to each player Tuesday, February 9, 2016 Nash equilibrium: an outcome where both players are playing their best strategy, given the strategy chosen by opponent (tendency, NOT surety) - Made by John Nash - It is the outcome that a game is likely to gravitate towards - It is about where you are now not where you want to be - Culture can play a role (i.e. norms) “No regrets” outcome: No player can be made better off without the other player being made worse off Strategies for Finding Equilibria - Many have more than one Nash equilibrium - All equilibria need to be found to make sure the game is solved - 3 strategies o Cell-by-cell inspection: examine each possible outcome (cell) and determine if it is a Nash equilibrium Ask yourself, “If you get there, would you stay there?” can be tedious and time consuming (better for small matrices) any cell with Nash Equilibrium is a solution o Dominant Strategies: look at one row or one column and decide of it is dominant or not Look for a row or column where the player always has an incentive to play the same strategy o Best Response Analysis: comparing your options Prisoners dilemma: game where each player has a dominant strategy of defecting, and each ends up worse off than if they had both cooperated *no two cells in the same row or column can have Nash Equilibrium!* Pure coordination: where it only matters that the players coordination on an outcome, not on which outcome they coordinate - Neither player has a dominant strategy - 2 outcomes coordinate or fail to coordinate - Nash equilibria at every place where there is coordination - Payoff for coordinating is higher Thursday, February 11, 2016 Assurance Game: game in which players want to coordinate on an outcome and in which both agree that coordinating on one particular outcome is preferred to coordinating on the other - Same Nash equilibrium is preferred by all players - Neither have a dominant strategy - Payoff is higher with coordinating - Players either coordinate or fail Battle of the Sexes: both players want to coordinate, but each player prefers coordinating on a different outcome - Tough strategy: pursues players preferred Nash equilibrium - Weak strategy: leads to a non-preferred Nash equilibrium - Goal: manipulate your opponent - Nash equilibria at each place they coordinate - Each prefers a different Nash equilibrium Chicken: version of battle of the sexes that results in disaster if each player plays his or her tough strategy - Neither have a dominant strategy - Coordination is when one player plays tough, and the other plays weak - Each player has different Nash equilibrium - When both play tough, both experience disastrous outcome - This is worse than battle of the sexes ends with disaster o Disaster: worst possible outcome
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