(a) Discuss how asymmetric information can influence decision-making: (i) In game theory, regarding competitors’ pricing. (ii) Between insurance companies and their clients.
(a) Discuss how asymmetric information can influence decision-making:
(i) In game theory, regarding competitors’ pricing.
(ii) Between insurance companies and their clients.
(b) Two hotels, Hotel Sandy and Hotel Magda, are competing for a limited number of tourists. The hotels
have approval to either expand hotel operations, or add recreational water sports to their offerings. No
one hotel has approval do both of these changes. A research company has determined that the
following outcomes are likely:
If Hotel Sandy expands, and Hotel Magda adds water sports, Hotel Sandy will increase its market share
by 1%, and Hotel Magda will increase its market share by 3%.
If Hotel Sandy adds water sports, and Hotel Magda expands, Hotel Sandy will decrease its market
share by 5%, and Hotel Magda will increase its market share by 2%.
If both hotels add water sports, Hotel Sandy will increase its market share by 4%, and Hotel Magda
will increase its market share by 5%.
If both hotels expand, Hotel Sandy will increase its market share by 2%, and Hotel Magda will
decrease its market share by 5%.
Given that both hotels employ game theory, what course of action would each hotel take?
(c) Consider the following two-player, zero-sum game:
Y1 Y2
X1 -2 8
X2 10 -5
What is the outcome of this game?
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