EDU ECO2003 Brief summary Revision.pptx

# All cs is extracted total surplus is maximised but it

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All CS is extracted; total surplus is maximised, but it comprises only of producer surplus (as CS = 0); there is no deadweight loss. The diagram here shows how price discrimination affects Consumer Surplus and Producer Surplus

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The prisoner’s dilemma All of this information can be summarised in a payoff matrix . We see that there is a player whose strategies are represented on the rows, and a player whose strategies are represented along the columns. The body of the matrix includes the payoffs that correspond to each combination of strategies. What is the outcome that we end up at? In other words, what is the Nash Equilibrium of this game? 52
Dominant strategies In some games, like the prisoner’s dilemma, each individual has what is known as a dominant strategy . A dominant strategy is a strategy that always provides a better payoff to a player than the alternative . Let’s see if we can find the dominant strategy in the prisoner’s dilemma on the right. To find out whether there is a dominant strategy, we see whether one of the strategies always gives a better payoff. To do this, we consider each choice a player can make one at a time. 53

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Dominant strategies The first thing we can do is ask what the best response is for Prisoner B when Prisoner A confesses . Will Prisoner B confess to get 5 years, or remain silent and get 20 years? Similarly, what does Prisoner B want to do when Prisoner A remains silent? Prisoner B has the choice between confessing and getting 0 years, or remaining silent and getting 1 year. Note how Prisoner B always chooses to confess . This means that confessing is Prisoner B’s dominant strategy – because it is the strategy that always gives Player B the highest payoff. 54
Nash Equilibrium from dominant strategies Note how Prisoner A also has a dominant strategy to confess. We know that a Nash Equilibrium is a situation in which a player has no incentive to change their action, given the other player’s strategy . Because a dominant strategy always gives the player the highest payoff they can get under the circumstances, the Nash Equilibrium occurs where both players play their dominant strategies . Visually, this is where we have circled both payoffs in a cell – this gives credence to the definition of a Nash Equilibrium being a mutual best response . 55

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The prisoner’s dilemma Notice how the Nash Equilibrium ends up being where both prisoners confess – i.e. NE = (Confess, Confess) But, if both players remained silent , then we see that both prisoners would only have got 1 year in prison. The problem is that even if both prisoners say they’ll keep quiet, there is an individual incentive to confess. This is reflective of the problem of firms trying to collude to set higher prices – is it not in the best interest of one firm to say they’ll price high, but then undercut the price they said they’d price and then capture the whole market? 56
Stackelberg Model Question example Boardwork
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• Spring '15
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