Answered: Game Theory a) Consider the following…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Game Theory

a) Consider the following game represented by the game tree below. If you observe Blue Bank playing medium and Green Bank playing bottom, would you be surprised by their choices? Carefully explain why or why not.

b) Now assume that Blue and Green Banks play the game with the same actions and payoffs as in a) but they make their choices simultaneously. What is the payoff matrix for this new game? What do you predict will happen in the game? Explain.

c) Assume that the game from part a) is played five times, i.e. Blue and Green Banks play a repeated game with the stage game described in a). What do you predict will happen in the game? Explain.

Green Bank
top
(6,4)
Blue Bank
high medium
Green Bank
bottom
top
(2,3) (7,5)
bottom
(4,6)
low
top/
(5,2)
Green Bank
bottom
(5,6)

Definition Definition Economic decision-making framework that analyzes how different players optimize their outcomes with given pay-offs corresponding to their available strategies. The assumptions of game theory are: The number of players or competitors are finite/limited; All participants are rational The rules of the game are known to every player; and Each participant has a finite set of actions. A common way in which game theory is presented as an ( m x n ) matrix in which m represents the strategies of row player and n represents the strategies of column player. There are several limitations of game theory: Many businesses have a large number of competitors, and selecting an optimal strategy in these circumstances is difficult; Real-life business operating environments are full of uncertainty and difficult to model as a game theory; and The assumption of rationality and utility maximization isn't always an accurate portrayal of human nature.

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