Econ 202 Unit 4

Consider the following game, where players' payoffs are measured in dollars. Which of the following statements is true?

(Defect, Defect) is the Nash equilibrium When both players defect, no player has incentive to cooperate, because that would reduce their payoff from 40 to 0. Since both players would be better off at (Cooperate, Cooperate) than at (Defect, Defect), this game is a prisoners' dilemma.

Guy and Ray can either bike or drive to work. Guy likes biking more than Ray, and both people like biking more when the other person also bikes. Their payoffs are shown below. What is the Nash equilibrium in this game?

(Drive, Bike), that is Ray drives and Guy bikes (Drive, Bike) is the only Nash equilibrium in this game, because it is the only outcome for which neither player has an incentive to change their strategy. Ray would be worse off choosing to bike to work, because he would receive a payoff of 2 rather than 4. Similarly, Guy would be worse off choosing to drive to work, because he would receive a payoff of 2 rather than 3.

game theory

A branch of mathematics that studies strategic interactions, meaning situations in which each actor knows the benefits they receive depend on the actions taken by all

Which of the following statements regarding Nash equilibrium are correct?

In a Nash equilibrium, no player has an incentive to change their strategy given the other player's strategy. A Nash equilibrium can also be defined as a set of strategies such that each player's strategy is a best response to the strategies chosen by the other player(s). A Nash equilibrium is an equilibrium because no player has an incentive to change behavior.

Consider an ultimatum game of sharing a pie of $100. The first table shows the cumulative percentage of the Responders who accept the amount offered by the Proposers for when the game was played with two separate groups (Kenyan farmers and US university students). The second table shows the percentage of the Proposers who made those offers in the two groups. Based on this information, which of the following statements is correct?

In both groups, the highest proportion of Proposers offered the amount that maximized their expected payoff. The maximum expected payoff occurs at $40 for Kenyan farmers ($57.60) and at $30 for US students ($58.80). These are indeed the offers for which there were the highest proportions of offers.

minimum acceptable offer

In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. Generally applied in bargaining situations to mean the least favorable offer that would be accepted.

Which of the following is a non-excludable public good?

Streetlights Streetlights are non-excludable (since you cannot stop your neighbors from benefitting) and non-rival (since your use does not reduce the light available to your neighbors). This makes them a pure public good.

game

a model of strategic interaction that describes the players, the feasible strategies, the information that the players have, and their payoffs

reciprocity

a preference to be kind or to help other who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind

Nash Equilibrium

a set of strategies for each player in the game, such that each player's strategy is a best response to the strategies chosen by everyone else

social dilemma

a situation in which action taken independently by individuals in pursuit of their own private objectives result in an outcome which is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals

Strategic Interaction

a social interaction in which the participants are aware of the ways that their actions affect others

revealed preference

a way of studying preferences by reverse engineering the motives of an individual from observations about her or his actions

fairness

a wya to evaluate an allocation based on one's conception of justice

dominant strategy

action that yields the highest payoff for a player, no matter what the other players do

strategy

an action that a person may take when that person is aware of the mutual dependence of the results for herself and for others. The outcomes depend not only on that person's actions, but also on the actions of others

dominant strategy equilibrium

an outcome of a game in which every player plays his or her dominant strategy

social norms

an understanding that is common to most members of a society about what people should do in a given situation when their action affect others

free ride

benefitting from the contributions of others to some cooperative project without contributing oneself

best response

in game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select

cooperation

participating in a common project that is intended to produce mutual benefits

social preference

preferences that place a value on what happens to other people, even if it results in lower payoffs for the individuals

social interactions

situations in which the actions taken by each person affect other people's outcomes as well as their own

payoffs

the benefit to each player associated with the joint actions of all the players

division of labor

the specialization of producers to carry out different tasks in the production process

altruism

the willingness to bear cost in order to benefit somebody else

Which of the following statements regarding social preferences is correct?

Altruism is an example of social preferences. Altruism is the willingness to bear a cost in order to benefit somebody else. Therefore it is an example of social preferences.

inequality aversion

a dislike of outcomes in which some individuals receive more than others

sequential game

a game in which all players do not choose their strategies at the same time, and the players that choose later can see the strategies already chosen by the other players, for example the ultimatum game

simultaneous game

a game in which players choose strategies simultaneously, for example the prisoners' dilemma

Consider the following assurance game. The table below shows both players' payoffs (measured in dollars) for each strategy set. Which of the following statements best summarizes this social interaction?

Both players want to attend the same event, but Anthony prefers the opera and Becky prefers football. Yes, the Nash equilibria in this game are (Opera, Opera) and (Football, Football). Anthony prefers the former, and Becky prefers the latter.

zero sum game

a game in which the payoff gains and losses of the individuals sum to zero, for all combinations of strategies they might pursue

prisoners' dilemma

a game in which the payoffs in the dominant strategy equilibrium are lower for each player, and also lower in total, than if neither player played the dominant strategy

public good

a good for which use by one person does not reduce its availability to others

Consider the following four games where players Row and Column each have two strategies: A and B. Which of the following games illustrates a prisoners' dilemma?

This is a prisoners' dilemma because there is a single Nash equilibrium, (B, B), and this dominant strategy equilibrium is worse for both players than if both players played the strategy A.