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Economics Chapter 3
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Key Concepts:
Terms in this set (14)
Game Theory
A method of analyzing the strategic interaction that occurs between small numbers of people, firms, organizations, and even countries.
Strategic interaction
anticipating the decisions others will make in response to your decisions, knowing all the while that they are anticipating your response
mutual interdependence
the characteristic of games whereby the outcome of the game depends not only on what you do but on what the other players do in response
Economic Model
A structured and simplified version of reality that we can use to explain real world behavior
Payoff Matrix
A table that summarizes who the players are. the actions available to each player, and the payoffs available to each player for each action that he or she might choose, given the action chosen by his or her rival.
Nash Equilibrium
An outcome where both players are playing their best strategy, given the strategy chosen by the opponent
Dominant Strategy
A strategy that is universally best, regardless of the strategy chosen by others
Prisoner's Dilemma
A game in which each player has a dominant strategy of defecting, and each ends up worse off than if they had both cooperated.
Rationality Assumption
The assumption that given the strategy chosen by the other participant, a player will always choose the strategy that brings him or her the best payoff
pure coordination game
a game where it only matters that the players coordinate on an outcome, not which outcome they coordinate on
best-response analysis
A technique for locating equilibria by marking the best strategy a player can use to counter each of his or her rival's possible moves
Battle of the Sexes Game
A game in which both players want to coordinate, but each players prefers coordinating on a different outcome.
Assurance game
A game in which players want to coordinate on an outcome and in which both agree that coordinating on one particular outcome is preferred to coordinating on the other
Chicken Game
A version of the battle of the sexes game that results in disaster if each player plays his or her tough strategy.
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