microeconomics intro lecture 10

What is game theory?

The study of decision making where a firms decisions affect the outcomes of other

What is a simultaneous single-move game?

A game where all players make their decisions at the same time wthout knowing what the other player chose

What is complete information?

When players knows the possible choice and payoffs but not know the opponents decision before choosing

What is a normal form game?

A payoff table showing every possible combination of strategies and the payoff for each player

What is a dominant strategy?

The strategy that gives the highest payoff regardless of what the other player chooses

what is the prisoners dilemma?

A situation where rational, self-interested decisions lead to a worse outcome than if both players had cooperated

why do both prisoners confess?

Because confessing in each prisoners dominant strategy, even though both would be better off if neither confessed

What is a nash equilibrium?

A situation where neither player can improve their outcome by changing strategy alone because each is already playing their best response.

what is a repeated game?

Agame where the same players compete repeatedly so previous decisions affect future behaviour

What is a trigger strategy?

A strategy where a players future actions depend on how the rival behaved previously

what is backward induction?

solving a game by starting with the final decision and working backwards

why is cooperation difficult when the end date is known?

Because players know there is no future punishment in the last round, so cooperation unravels through backward induction

what is a sequential game?

a game where plyers make decisions one after another instead of simultaneously

What is a decision tree?

a diagram showing the order of decisions and the possible outcomes in a sequential game

What is first-mover advantage?

The advantage a player may gain by making the first move, although it depends on the payoffs.

What are credible threats?

Threats that a rival genuinely believes will be carried out because the player is committed to them.

Give three limitations of game theory.

Assumes rational behaviour.

Difficult with many players.

Ignores emotions and fairness.

What is the most important idea behind game theory?

Firms make decisions by considering how rivals are likely to respond.

Which game usually involves a payoff matrix?

Simultaneous single-move games.

Which game usually uses a decision tree?

Sequential games.

What is the difference between simultaneous and sequential games?

Simultaneous: players decide at the same time.

Sequential: players decide one after another.

Which two concepts are most commonly tested in game theory?

• Prisoner's Dilemma

• Nash Equilibrium