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201Winter2010PartIII

201Winter2010PartIII - Please Remember In universities...

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Please Remember: In universities classes and class notes are an introduction to the topic. 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: Best-Response 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. Simultaneous-Move Games Assume that there are two agents, called "ROW" and "COLUMN". 1

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Assume 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. well-being is given by formula "grade-e/ort"). If student A chooses high e/ort and student B chooses high e/ort, both students get
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201Winter2010PartIII - Please Remember In universities...

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