ECON 201 1st Edition Lecture 16I. Game Theory Game - The results of one person’s actions depend on others A.) Strategies in Games1. Pure strategy is a specific action taken by a player2. Mixed strategy is a probabilistic action, with different weights or probabilities assigned to each actiona. Sometimes answers our questions in class and sometimes doesn’t in order to getstudents to study on own (Sly’s mixed strategy)3. Dominant Strategy is an action that is the best that a player can choose, regardless of what another player choosesB.) Games and Playoffs1. Advertising game a.b. Numbers come from estimates c. Managers are hired to determine what to play d. If player 2 chooses “Don’t Advertise,” then player 1 chooses to “Advertise” and earns 15e. If player 2 chooses to “Advertise,” then player 1 chooses to “Advertise” and earns 10f. Then Player 1 has dominant strategy to advertiseg. Player 2’s best response is to advertise h. Does either player have an incentive to deviate from advertising?i. Neither player wants to deviate = this game has an equilibrium because no one has an incentive to deviate ii. Whenever you analyze a game you should ask the question “does either player have an incentive to deviate?”2. Now, suppose the payoffs were different These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.a.b. If player 2 chooses “Don’t Advertise,” then player 1 will choose “Don’t Advertise”c. If player 2 chooses “advertise,” then player 1 will choose “advertise”d. Player 1 does not have a dominant strategy (it doesn’t stay the same regardless of what their competitor does)e. Suppose both player choose Advertisingi. Does player 1 benefit from deviating? = NOii. Does player 2 benefit from deviating? = Noiii. Thus (Adv, Adv) is a Nash Equilibrium iv. Thus (Don’t Adv, Don’t Adv) is not a Nash Equilibrium 3. Prisoner’s Dilemma a.b. If player 2 chooses to confess, then player 1 will choose to confess c. If player 1 chooses confess, then player 2 will choose to confess d. Does either player have an incentive to deviate from (confess, confess)? = NO! (confess, confess) is a Nash Equilibrium e. The first best payoff of the game is not optimal f. EX: Batman – 2 ferry boats have a detonator to the other boati. If you blow the other boat up first you won’t get blown up and vice versaii. BUT, if neither of you blow the other boat up then no one gets blown upand no one dies- In games as opposed to markets in which your payoff is determined by the actions by others, your economic concept is not to deviate (Nash
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