Ec101F10L2_100930 - Economics 101, UCLA Fall 2010 Jernej...

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Economics 101, UCLA Fall 2010 Jernej Copic Lectures 2 and 3, 9/30/10. Sequential Rationality and introduction to Game Theory: se- quential games and simultaneous games. Alan was well settled in California. After meeting Squitty, whom he found to be a rather odd character, and after having lost all his money to the oddness of that same character, and still after having endured some yelling from No1 to this regard, he had accustomed himself to the local lifestyle quite well. So well that on that Friday afternoon he started wondering whether on Saturday he would prefer relaxing at home, skiing in Mammoth, or surfing in San Diego. Given that he was by now fully rational that didn’t seem like much of a challenge. So he started pondering:“Well, I could drive down to San Diego, and then, if I want to surf, that should be just perfect. Oh, but if I then want to relax at home, then, ehm. .., let me think about this. .. I got it - I should not drive to San Diego so that if I want to relax at home I can do that; wait, but what about if I want to ski? Darn. ..” So he quickly gave up and called up Bob, explaining him the problem. Bob grudg- ingly listened, until he finally lost his patience: “That’s a tough problem, DUDE! It’s a simple world! Just decide what you want tomorrow; After you decide, drive yourself to the appropriate place, and everything should be just fine. You hear me?!” After Bob hung up on him, Alan thought again. He realized that it was all to his advantage: the fact that he, Alan, was so monotonous in his moods and aspirations, that his life was so boringly stable, and that even the weather never seemed to change. All that meant that Bob was right. He just had to figure out what he would like doing the next day, and then make the appropriate choice today. Since he was now rational and his preference so stable that it would not change, he would just have to ask himself the question of what he would like to do most on Saturday, and then backward induct from there. Indeed, doing anything else would not seem rational, for instance, driving to San Diego, and then figuring that he in fact wanted to relax would be somewhat costly, to say the least. .. “Alan, you are such a clever man with the perfect plan.” He smiled to himself. He was sequentially rational. 1
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Introduction to Game Theory Jeremiah had a meeting to attend with No1 and his team in order to discuss details of a job that Jeremiah was to do for No1. As a result, No1 would make $400 of which he would pay $200 to Jeremiah. Their meeting was scheduled to take place on Thursday morning at 9am. So on Wed afternoon, while Jeremiah was busy out of office, No1 would email Jeremiah’s secretary Clodoveo (Clodoveo works from 9am to 5pm and strictly fol- lows Jeremiah’s instructions). No1 would presumably state whether he would be coming to UCLA, or whether he would be staying in Downtown LA. Clodoveo would then schedule Jeremiah’s activities strictly according to Jeremiah’s instructions – Clodoveo’s brain is big
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This note was uploaded on 10/13/2010 for the course ECON econ 101 taught by Professor Buddin during the Spring '10 term at UCLA.

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Ec101F10L2_100930 - Economics 101, UCLA Fall 2010 Jernej...

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