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HomeHomework HelpeconomicsGame Theory

Game Theory

Game Theory studies strategic interactions among rational decision-makers, illustrated through tools like the Payoff Matrix. This matrix helps in analyzing scenarios such as the Prisoner's Dilemma, where individuals must decide between cooperation and self-interest, often leading to suboptimal outcomes. Understanding these dynamics is crucial for grasping competitive behaviors in economics and can significantly impact decision-making in business and policy contexts.

intermediate
5 hours
Economics
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Overview

Game Theory is a vital tool for understanding strategic interactions in various fields, including economics, political science, and biology. It provides insights into how individuals and organizations make decisions when their outcomes depend on the actions of others. By analyzing different types of...

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Key Terms

Nash Equilibrium
A situation where no player can benefit by changing their strategy while the other players keep theirs unchanged.

Example: In a pricing game, if both companies set their prices at a certain level, neither will benefit from changing their price alone.

Zero-Sum Game
A situation in which one player's gain is exactly balanced by the losses of other players.

Example: In poker, the amount won by one player is equal to the amount lost by others.

Dominant Strategy
A strategy that is best for a player, regardless of what the other players do.

Example: In a game where two firms choose prices, a lower price may be a dominant strategy if it always leads to higher profits.

Cooperative Game
A game where players can negotiate and form coalitions to achieve better outcomes.

Example: In a joint venture, companies collaborate to maximize their profits.

Payoff Matrix
A table that describes the payoffs in a strategic game for each combination of strategies.

Example: A payoff matrix can show the outcomes for two firms choosing different pricing strategies.

Mixed Strategy
A strategy where a player randomizes over possible moves to keep opponents uncertain.

Example: In soccer, a player might randomly choose to shoot left or right to confuse the goalkeeper.

Related Topics

Behavioral Economics
The study of psychological factors that influence economic decision-making.
intermediate
Auction Theory
The study of bidding strategies and outcomes in auction settings.
intermediate
Mechanism Design
A field that focuses on creating systems or mechanisms to achieve desired outcomes.
advanced

Key Concepts

Nash EquilibriumZero-Sum GamesCooperative GamesDominant Strategy