This is a complete and comprehensive summary of all content covered for ECO2007 - Cooperation and Competition class test 1 (modules 1, 2, 3 and 4). It contains everything you need to know to fully understand the course material, including detailed lecture notes and examples. The colourful and clear...
ECO2007S: Co-operation and Competition (Game Theory)
Test 1 Notes
Module 1: Chapter 1
Game Strategies
• Instances of games = Events and interactions.
• Strategy = Mental skill or calculation needed to do well in a game.
Game theory
• The analysis or science of interactive decision-making (the optimal outcome
depends on what others are doing).
• The science of rational behaviour in interactive situations (players are perfect
calculators and follow their best response).
Examples of Strategic Games
Example 1
Grades are determined by a curve. You have to work hard relative to how hard
everyone else works. The class agrees not to work too hard. However, everyone
changes their mind in an attempt to get one of the good grades. Your grade turns out to
be no better than it would have been, had everyone abided by the agreement.
This is the prisoners’ dilemma: You and another prisoner are both told that, if you
confess, you will get a good deal. However, if the other prisoner confesses 1st, you will
receive a tough sentence.
Prisoner B
Prisoner A Confess Remain silent
Confess 5, 5 0, 20
Remain silent 20, 0 1, 1
, Example 2
2 students went to a party before their exam and did not have time to prepare. They tell
their lecturer that they had a flat tire and ask for a make-up exam. The lecturer agrees.
The question on the exam is “Which tyre?”. The friends’ answers must match.
The students should have foreseen this action by the lecturer and prepared. This
involves looking ahead to future moves and reasoning backwards to identify the best
action now (Chapter 3 and 10).
If this is not possible, they may resort to logical assessing the most likely answer. This
requires a convergence of expectations.
Focal point = A commonly-expected strategy on which players can successfully
coordinate.
Example 3
Students wanting extensions, even for valid reasons, find the lecturer to be tough. The
lecturer’s problem is determining valid excuses from questionable ones. If the lecturer
is too lenient, many students may procrastinate. The lecturer may therefore chose not
to accept any excuses, by making a commitment to avoid the temptation to give in.
This involves making a commitment that is firm and credible (Chapter 10).
Example 4
2 housemates, who agreed to share expenses equally, both don’t want to go shopping.
Supplies are running out. Usually, the most desperate and impatient one gives in 1st.
Scenario 1: Each housemate has a primary choice to go shopping or not.
Your housemate
You Go shopping Stay home
Go shopping Wasted effort Your worst
outcome
Stay home Your best outcome Chaos
This is a game of chicken: Two people drive their cars toward each other and the 1st to
swerve (and avoid the collision) is labelled the chicken.
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