Mar 15, 2011 - Lecture 17 Econ 221 Assignment#4 due on...

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The strategy, RL, could be considered a threat since it ʼ s not in Bob ʼ s best interest to choose Right if Alice chooses South. -not a normative statement Econ 221 Assignment #4 due on Tuesday, 22nd March (in class) Sub-game Perfect Nash Equilibrium -In this scenario we break down the game tree into two sub-games, as shown below. -Then we identify all the pure strategies that each player has. S Alice = { N, S } S Bob = { LL , LR, RL, RR } -And this is the game in Normal Form Bob LL LR RL RR N (5, 2) (5, 2) (1, 0) (1, 0) Alice S (4, 4) (6, 0) (4, 4) (6, 0) -Therefore, there are two Nash equilibria: (N, LL) and (S, RL) -If we go back to the tree, we can look ahead and reason back : -this will tell us which of the two equilibria is the actual outcome of the game, highlighted by the red lines --> this is called the Equilibrium Path Prisoners ʼ Dilemma Bob Defect Cooperate Defect (5, 2) (5, 2) Alice Cooperate (4, 4) (6, 0) March 15, 2011 - Lecture 17 Alice North Right Right South (5, 2) (1, 0) (4, 4) (6, 0) Bob Bob X Y Equilibrium Path Left
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