Micro Chapter 9: Games and Strategic Behavior

a game with no dominant strategy is called...

zero sum game

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. If both players choose their dominated strategy they will each earn ______, and if both players choose their dominant strategy they will each earn______.

$1,000; $900

What are the 3 basic elements of a game?

- Players - Available strategies or actions - The payoff to each player for each possible combination of strategies

Jill and Jack both have two pails that can be used to carry water down from a hill. Each makes only one trip down the hill, and each pail of water can be sold for $5. Carrying the pails of water down requires considerable effort. Each child would be willing to pay $2 to avoid carrying one pail down the hill, and an additional $3 to avoid carrying a second pail down the hill.a. If Jack and Jill each must decide whether to carry one or two pails of water down from the top of the hill, how many pails will each child choose to carry?

2 pails

Game theory is not useful in understanding perfect competition because in a perfectly competitive market...

no single firm can influence the market price, so firms' decisions are not interdependent

any combination of strategies in which each player's strategy is his or her best choice given the other player's strategies

Nash equilibrium

Consider to the accompanying payoff matrix. Player B Left Right Player A Up 60 for A 70 for A 60 for B 5 for B Down 5 for A 50 for A 70 for B 50 for B If player A makes his or her choice before player B, then what will be the equilibrium outcome of this game?

Player A and B both get 60

Consider the accompanying payoff matrix. Player B Left Right Player A Up. 60 for A 70 for A 60 for B 5 for B Down. 5 for A. 50 for A 70 for B 50 for B Suppose both players make their choices simultaneously and independently. What is the Nash equilibrium of this game?

Player A chooses up and Player B chooses left

all payoffs are known to all parties

assumptions

coalition of firms that agree to restrict output to increase economic profit; restrict total output and agree on a set price; never works

cartel

describes possible moves in a game in sequence

decision tree

one that yields the higher payoff no matter what the other player does

dominant strategy

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. For Joe, keeping his price at $3 per gallon is a...

dominated strategy

any other strategy available to a player who has a dominant strategy

dominated strategy

a decision tree is also called a...

game tree

A decision tree is used when modeling...

games in which timing matters

The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. Firm B Invest Not Invest Firm A Invest 20 for A 70 for A 20 for B 5 for B Not Invest. 5 for A. 50 for B 70 for B. 50 for A Firm A's dominant strategy is to ______, and Firm B's dominant strategy is to ______.

invest; invest

Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The payoffs they receive from seeing the films either together or separately are shown in the payoff matrix below. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. This game:

is not a prisoner's dilemma

most cartels cease to be effective because...

of the incentive to cheat on the cartel agreement

table that describes the payoffs in a game for each possible combination of strategies

payoff matrix

a game in which each player has dominant strategy, and when each plays it, the resulting payoffs are smaller than if each played a dominated strategy

prisoner's dilemma

A payoff matrix shows...

the payoffs for each possible combination of strategies

a prisoner's dilemma is a game in which...

the player's payoffs are smaller when both play their dominant strategy compared to when both play their dominated strategy

the dilemma in a prisoner's dilemma is that...

the players would be better off if they both played a dominated strategy.

T/F: when timing doesn't matter, the payoff matrix shows no dominant strategy

true