MicroEconomics - Lecture 8

MicroEconomics - Lecture 8 - Game Theory and Its...

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Game Theory and Its Applications 1. Game Theory Static games (of complete information) Games consist of players, actions (strategies), and preference. Let’s focus on two-person games with a finite number of actions. Example: Battle of Sex Two players- Husband (H) and Wife (W) Actions: H: Baseball, Ballet W: Baseball, Ballet Preference: H: 1. Baseball together 2. Ballet together 3. Husband-Baseball and Wife- Ballet 4. Husband-Ballet and Wife-Baseball W: 1. Ballet together 2. Baseball together 3. Husband-Baseball and Wife- Ballet 4. Husband-Ballet and Wife-Baseball Example: Cold War Two Players: USA and USSR Actions: USA: Arm, Disarm USSR: Arm, Disarm Preference: USA: 1. USA arms/USSR disarms 2. Both disarm 3. Both arm 4. USSR arms/USA disarms USSR: 1. USSR arms/USA disarms 2. Both disarm 3. Both arm 4. USA arms/USSR disarms
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Two Assumptions: Rationality: All players are rational, meaning that they maximize their own utility. Common Knowledge: Players know that other players are rational, and also know that
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MicroEconomics - Lecture 8 - Game Theory and Its...

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