Inhoudsopgave
Lecture week 1.............................................................................................................................................. 3
Lecture 1 Clip 1: Decisions and uncertainty..........................................................................................................3
Lecture 1 Clip 2: Risk attitudes.............................................................................................................................8
Lecture 1 Clip 3: Measures of risk aversion........................................................................................................12
Lecture 1 Clip 4: Discounted Utility – time consistent behaviour.......................................................................15
Lecture 1 Clip 5: Time: inconsistent decision making.........................................................................................21
Lecture week 2............................................................................................................................................. 26
Lecture 2 Clip 1: Introduction strategic behavior...............................................................................................26
Lecture 2 Clip 2: Oligopoly..................................................................................................................................28
Lecture 2 Clip 3: Game Theory Toolbox 1: Nash and dominant strategies........................................................29
Lecture 2 Clip 4: Game Theory Toolbox 2: Dominated strategies......................................................................32
Lecture 2 Clip 5: Game Theory Toolbox 3: Mixed strategies..............................................................................33
Lecture 2 Clip 6: Cournot model.........................................................................................................................37
Lecture 2 Clip 7: Bertrand model........................................................................................................................43
Lecture week 3............................................................................................................................................. 47
Lecture 3 Clip 1: Sequential encounters.............................................................................................................47
Lecture 3 Clip 2: Game Theory Toolbox 4...........................................................................................................47
Lecture 3 Clip 3: Game Theory Toolbox 5...........................................................................................................51
Lecture 3 Clip 4: Game Theory Toolbox 6...........................................................................................................55
Lecture 3 Clip 5: Entry deterrence......................................................................................................................58
Lecture 3 Clip 6: Stackelberg model...................................................................................................................60
Lecture 3 Clip 7: Bargaining...............................................................................................................................64
Lecture week 4............................................................................................................................................. 67
Lecture 4 Clip 1: Incomplete information introduction......................................................................................67
Lecture 4 Clip 2: Cournot oligopoly with private information............................................................................74
Lecture 4 Clip 2: Cournot oligopoly with private information............................................................................77
1
,2
,Lecture week 1
Lecture 1 Clip 1: Decisions and uncertainty
Uncertainty and time (niet behandeld in micro 1, wel nu in week 1)
Uncertainty important because many decisions involve uncertainty;
- Investments
- Insurance
- Education (will there be a job for you, what will your wage be)
- Policy (macro economic perspective); environment (what will happen to climate
change), inequality and safety
- …
- Life is full of uncertainty
Risk and uncertainty are not the same
- Frank Knight Made a distinction
- Words are used interchangeably, but this week we look at risk (thus the probabilities
are known) > most of the course about risk, but in week 7 with prospect theory we
have uncertainty
- Uncertainty = likelihood of outcomes are unknown
- Risk = likelihood of outcomes are known
But both still have uncertain outcomes
What are risky outcomes
- uncertain outcomes
- Probabilities are associated with risky outcomes
- Statistics: probabilities between zero and 1 that indicate the likelihood that a
particular outcome will occur
- In the absence of a known probability, economic agents have to estimate - based on
either frequency or subjective probability
Example decisions problem
- pseudo player: a player we assume there to be that determines whether the
outcome becomes x or y. It generates the probabilities
3
, - Comparing two options with expected values, we calculate.
- Formula below
- Then we need to evaluate risky outcomes. We do not only think in terms of money,
but also in terms of utility
- Outcome of option 1 is certain, so there we talk of utility
- Outcome of option 2 is uncertain as there are 2 possible outcomes, so we talk of
expected utility
In order to evaluate the expected utility, we need to understand the decision makers
preference toward risk
We look at 2 concepts (crucial for understanding what we do this week)
1) Utility of expected value
4
Lecture week 1.............................................................................................................................................. 3
Lecture 1 Clip 1: Decisions and uncertainty..........................................................................................................3
Lecture 1 Clip 2: Risk attitudes.............................................................................................................................8
Lecture 1 Clip 3: Measures of risk aversion........................................................................................................12
Lecture 1 Clip 4: Discounted Utility – time consistent behaviour.......................................................................15
Lecture 1 Clip 5: Time: inconsistent decision making.........................................................................................21
Lecture week 2............................................................................................................................................. 26
Lecture 2 Clip 1: Introduction strategic behavior...............................................................................................26
Lecture 2 Clip 2: Oligopoly..................................................................................................................................28
Lecture 2 Clip 3: Game Theory Toolbox 1: Nash and dominant strategies........................................................29
Lecture 2 Clip 4: Game Theory Toolbox 2: Dominated strategies......................................................................32
Lecture 2 Clip 5: Game Theory Toolbox 3: Mixed strategies..............................................................................33
Lecture 2 Clip 6: Cournot model.........................................................................................................................37
Lecture 2 Clip 7: Bertrand model........................................................................................................................43
Lecture week 3............................................................................................................................................. 47
Lecture 3 Clip 1: Sequential encounters.............................................................................................................47
Lecture 3 Clip 2: Game Theory Toolbox 4...........................................................................................................47
Lecture 3 Clip 3: Game Theory Toolbox 5...........................................................................................................51
Lecture 3 Clip 4: Game Theory Toolbox 6...........................................................................................................55
Lecture 3 Clip 5: Entry deterrence......................................................................................................................58
Lecture 3 Clip 6: Stackelberg model...................................................................................................................60
Lecture 3 Clip 7: Bargaining...............................................................................................................................64
Lecture week 4............................................................................................................................................. 67
Lecture 4 Clip 1: Incomplete information introduction......................................................................................67
Lecture 4 Clip 2: Cournot oligopoly with private information............................................................................74
Lecture 4 Clip 2: Cournot oligopoly with private information............................................................................77
1
,2
,Lecture week 1
Lecture 1 Clip 1: Decisions and uncertainty
Uncertainty and time (niet behandeld in micro 1, wel nu in week 1)
Uncertainty important because many decisions involve uncertainty;
- Investments
- Insurance
- Education (will there be a job for you, what will your wage be)
- Policy (macro economic perspective); environment (what will happen to climate
change), inequality and safety
- …
- Life is full of uncertainty
Risk and uncertainty are not the same
- Frank Knight Made a distinction
- Words are used interchangeably, but this week we look at risk (thus the probabilities
are known) > most of the course about risk, but in week 7 with prospect theory we
have uncertainty
- Uncertainty = likelihood of outcomes are unknown
- Risk = likelihood of outcomes are known
But both still have uncertain outcomes
What are risky outcomes
- uncertain outcomes
- Probabilities are associated with risky outcomes
- Statistics: probabilities between zero and 1 that indicate the likelihood that a
particular outcome will occur
- In the absence of a known probability, economic agents have to estimate - based on
either frequency or subjective probability
Example decisions problem
- pseudo player: a player we assume there to be that determines whether the
outcome becomes x or y. It generates the probabilities
3
, - Comparing two options with expected values, we calculate.
- Formula below
- Then we need to evaluate risky outcomes. We do not only think in terms of money,
but also in terms of utility
- Outcome of option 1 is certain, so there we talk of utility
- Outcome of option 2 is uncertain as there are 2 possible outcomes, so we talk of
expected utility
In order to evaluate the expected utility, we need to understand the decision makers
preference toward risk
We look at 2 concepts (crucial for understanding what we do this week)
1) Utility of expected value
4
