Game theory helps to model
strategic behavior by agents who
understand that their actions affect
the actions of other agents.
Under this strategic thinking
Individual agents still do the best they
Some Important Types of Games
Games of coordination
Games of competition
Games of commitment
Simultaneous play games in which the
payoffs to the players are largest when
they coordinate their actio
In any Nash equilibrium (NE) each player
chooses a best response to the choices
made by all of the other players.
How can we locate every one of a
games Nash equilibria?
Graphical approach using Best Response
In a competitive market, the market is
made of lots of small firms.
A monopoly is an industry consisting a
An oligopoly is an industry consisting of
a few firms.
Lets focus on the duopoly, in which the
Lets revisit a firms production decision.
1) When producing any level of output, a firm
should choose a cost-minimizing mix of inputs.
2) Then it chooses the level of output that
maximizes its profit.
We spent m
11w 1'" - . , ; ,
Marg ice of capital rate . .
Factors OFPmdution Real rentll Pr suS Real interest rate
- . ver . _
Production function Economlc Pyofgt National SaVing (vi _ :11
Comm mums to scale accourlting pro rocluction Private saving g) iv
Problem Set 4. Cost and Cost Functions
1. A firm has the following production function: = . If the minimum cost of production is
equal to 4 when both input prices equal 1, what is y equal to?
Intuitively, x and z will be equal since they contrib