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All serious students are expected to study the textbook carefully. See the course outline for
which sections of the textbook are associated with each class.
Class 11:
BestResponse Strategies
Introduction
Remark.
the situation involves
strategic interaction
.
Remark.
Economic analysis of strategic interaction is based on game theory.
Remark.
Game theory consists of a set of tools, concepts, and assumptions that have been
Game
A description of a situation involving strategic interaction as a set of players and
their payo/s.
Player
Any ±rm²person²organization whose actions a/ects the outcome of a game.
Payo/
the game.
Payo/ Matrix
Payo/s of all players for all possible combinations of actions by the players
of the game.
SimultaneousMove Games
Assume that there are two agents, called "ROW" and "COLUMN".
1
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View Full DocumentAssume that that each agent has two possible actions:
"ROW" can choose "TOP" or "BOTTOM".
"COLUMN can choose "LEFT" or "RIGHT".
The payo/matrix is now a
2
2
matrix. The numbers before the comma represent the
payo/s of ROW, and the numbers after the comma represent the payo/s of COLUMN.
LEFT RIGHT
TOP
2
;
0
1
;
1
BOTTOM
1
;
1
0
;
2
Example
. Suppose that COLUMN and ROW are the only 2 students in a course where the
instructor grades on a curve so that the average is always
70%
, and that each student can
either choose HIGH e/ort or LOW e/ort.
Assume that the cost of high e/ort is (some number) H and the cost of low e/ort is (some
number) L.
wellbeing is given by formula "gradee/ort").
If student A chooses high e/ort and student B chooses high e/ort, both students get
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 Winter '10
 Mikko
 Game Theory, …rm

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