Professional Documents
Culture Documents
Lecture notes
Degenerate lottery assigns probability
1
Questions 11.2, 11.3 (except for part (a) — notice
by the way that in part (b) the expected iso-value
lines are just the parallel lines that have the same
expected value), 11.4, 11.5 (the certainty
equivalent of a lottery is defined in page 195 of
the textbook), and 11.6. Horizontal shows the probability p1
associated with the worst prize x1, while
How much are you willing to pay to the vertical axis shows the probability p3
insure against 100 000 loss? associated with the best prize x3
Objective probabilities: probabilities The probability of winning prize x2 is 1-
for which there is some statistical, 0.2-0.3=0.5 and can be inferred from the
experimental or analytical basis that horizontal length from c to the.
different people can agree upon Hypotenuse as shown by the dashed
Expected utility hypothesis magenta arrow.
either or both
delta ir
Independence: for any three lotteries p,q and r in
states is given by
which lies below the diagonal line Ca ,
meaning she is better off in the high state
as opposed to the low state
assume a is risk averse and has vNM
equated to MRSb = p/(1-p) Aruna charges 10, then mahala will charge
Solving we get xLa = xHa i.e. the contract 10 as well payoff of 50
curve coincides with the line of certainty Is aruna charges 15, then mahala will
Ca. charge 10 - payoff of 80
Therefore at any pareto efficient Regardless of what aruna charges,
allocation, consumer a is fully insured charging 10 is always the best for mahala
aginst he state contingent risk i.e. dominant strategy
Continue…. Dominated strategy: the payoff is always
11.4.1 Two risk averse consumers worse off regardless of what is chosen
Continue.. Dominant strategy equilibrium (DSE):
when players play their dominant
strategies. Each person has a strategy that
is the besno matter hwat others are
CH 12 Game Theory doing; no person has an incentive to
switch to a different strategy
Strategic interaction: outcomes depend
on all agents (10,10) was the dominant strategy
Normal form game: three basic elements equilibrium
– players, strategies and payoffs DSE cannot be applied when neither
e.g. player has a dominant strategy i.e. if one
player does not have a dominant strategy,
that game cannot have a DSE.
Prisoner’s dilemma:
Possible NE
Talk is a dominant strategy for each
prisoner (talk, talk) is a DSE
The prisoner’s dilemma because when the
prisoners follow their own self interst and
play their dominant strategies they end up
in prison for 10 years each as the DSE,
when instead they bouth would have
been better off being in prison for one (call, call) cannot be a NE
year if the two could find a way to remain Ii is a NE
silent Iii is also a NE
Being quiet is never in one’s self interest Iv is not a NE
Conditions: Method of mutual best response:
o Each player must have a dominant
strategy
o The DSE outcome must yield
payoffs that are worse for each
player than some other outcome
that is potentially possible in the
pay off matrix
A: accommodate entry
F: fight
Simultaneous games can be written in
extensive form
Profit maximised
‘
OR MR=MC
So
The MR for a linear inverse demand has
the same vertical intercept as the inverse
demand but is twice as steep
Example:
P=120-Q
C(Q)=Q^2
MR=120-2Q
MR=MC
MC=2Q
Q*=30
Sub Q* into inverse demand function to find
p*=$90.
Price is more than MC of producing the
last unit of output $60 so the absolute
mark up is $30.
Inverse demand is
CH 13 Oligopoly
Oligopolistic equilibrium, the behaviour of
firms corresponds to that of a Nash
Equilibrium (NE) i.e. each firm is
maximising its profit given the actions of
others.
Two ways to model:
o Quantity competition
o Price competition
Maximise
Plot both BR
The value of q1 maximises firm 1’s profit for the
given q2
Express q1 as a function of q2
Where
Impose symmetry Then total quantity produced is
and
So q* = 60
Assymetric duopoly (different MC)