Game Theory

Matriculation course: Microeconomics
Lecture 5. Introduction to game theory
Alfa Farah
Department of Economics
Diponegoro University
Updated August 19, 2021

Contents
Alfa Farah Matriculation course: Microeconomics 1/1

Oligopoly

Oligopoly
▶ Oligopoly falls between the extremes of perfect competition

and monopoly.
▶ Oligopoly is a market with relatively few firms but more than
one
▶ Oligopolies raise the possibility of strategic interaction among
firms.
▶ To analyse this strategic interaction rigorously, we use game
theory
▶ Our game-theoretic analysis will show that small changes in
details concerning the variables firms choose, the timing of
their moves, or their information about market conditions or
rival actions can have a dramatic effect on market outcomes.

Game Theory: Basic Concepts

Game Theory: Basic Concepts

Basic Concepts
▶ Game theory is a formal tool used to understand the strategic

interactions among two or more agents, where the optimal
strategy for one player depends on the strategies chosen by
others.
▶ The range of applications of game theory has been growing
constantly, including all areas of economics (from labour
economics to macroeconomics) and other fields such as
political science and biology.
▶ Game theory is particularly useful in understanding the
interaction between firms in an oligopoly.

Reinhard Selten John Nash John Harsanyi
(1930-2016) (1928-2015) (1920-2000)
Nobel 1994 Nobel 1994 Nobel 1994
Thomas Schelling Robert Aumann

(1921-2016) (1930-)
Nobel 2005 Nobel 2005
Eric Maskin Roger Myerson Leonid Hurwicz
(1950-) (1951-) (1917-2008)
Alvin E. Roth Lloyd Shapley Jean Tirole

(1951-) (1923-2016) (1953-)

Basic Concepts
▶ Two tasks involved when using game theory to analyse

economic situation
1. distilling the situation into a simple game
2. “solving” the given game, which results in a prediction about
what will happen.
▶ To solve a game, one takes an equilibrium concept (e.g., Nash
equilibrium) and runs through the calculations required to
apply it to the given game.

Basic Concepts
▶ A game is an abstract model of a strategic situation.

▶ Two types: non-cooperative and cooperative game.
▶ Three essential elements of a game:
1. Players
2. Strategies: each course of action open to a player during the
game.
3. Payoffs: received by each player for each combination of
strategies that could be chosen by the players.
Alfa Farah Matriculation course: Microeconomics 10 / 1

Basic Concepts
Basic notations used in game theory.

▶ Players are numbered from 1 to n and an arbitrary player is
called player i.
▶ Let Si denote the set of strategies open to player i. Let
si ∈ Si be a particular strategy chosen by player i. A strategy
profile will refer to a listing of particular strategies chosen by
each of a group of players.
▶ The final return to each player at the conclusion of a game is
called a payoff. Payoffs are measured in levels of utility
obtained by the players. In an n-player game, we can write the
payoff of a generic player i as Ui (si , s−i ), which depends on
player i’s own strategy si and the profile
s−i = (s1 , . . . , si−1 , si+1 , . . . , sn ) of the strategies of all players
other than i.

Basic Concepts
Example: Prisoner Dilemma
Two suspects are arrested for a crime. The district attorney has
little evidence in the case and is eager to extract a confession. She
separates the suspects and tells each: “If you fink on your
companion but your companion doesn’t fink on you, I can promise
you a 1-year sentence, whereas your companion will get 4 years. If
you both fink on each other, you will each get a 3-year sentence”.
Each suspect also knows that if neither of them finks then the lack
of evidence will result in being tried for a lesser crime for which the
punishment is a 2-year sentence.
▶ Players: 2 players
▶ Strategy sets: S1 = S2 = {fink, silent}
▶ Payoffs: U1 (fink, silent) = 3 and U2 (silent, fink) = 0,
▶ where payoffs are the years of freedom over the next 4 years.
Thus, 3 implies 3 years of freedom or similarly 1-year sentence.

Basic Concepts
▶ A (non-cooperative) game can be formalized in two different

ways, in its normal-form and in its extensive-form.

Nash Equilibrium

Nash Equilibrium
▶ Formalized by John Nash in the 1950s (Movie A Beautiful
Mind)
▶ Nash equilibrium involves strategic choices that, once made,
provide no incentives for the players to alter their behaviour
further.
▶ Thus, NE can be defined simply in terms of best responses.
Best Response
si is a best response for player i to rivals’ strategies s−i ,

denoted si ∈ BRi (s−i ), if
Ui (si , s−i ) ≥ Ui (si′ , s−i ) for all si′ ∈ Si . (1)

Nash Equilibrium
Nash Equilibrium
A Nash equilibrium is a strategy profile (s1∗ , s1∗ , . . . , sn∗ ) such

that for each player i = 1, 2, . . . , n, si∗ is a best response to
the other players’ equilibrium strategies s−i ∗ . That is, s ∗ ∈
i
∗
BRi (s−i ).
A simple example in two players game:
U1 (s1∗ , s2∗ ) ≥ U1 (s1 , s2∗ ) for all s1 ∈ S1 (2)

U2 (s1∗ , s2∗ ) ≥ U1 (s1 , s2∗ ) for all s2 ∈ S2 (3)

Nash Equilibrium in the Prisoner’s Dilemma
The NE is (fink, fink)

▶ If suspect 1 finks (the upper row), the best response of suspect 2 is fink,
since U2 (fink, fink) > U2 (fink, silent)
▶ If suspect 1 silent (the lower row), the best response of suspect 2 is fink,
since U2 (silent, fink) > U2 (silent, silent)
▶ If suspect 2 finks (the first column), the best response of suspect 1 is
fink, since U1 (fink, fink) > U2 (silent, fink)
▶ If suspect 2 silent (the second column), the best response of suspect 1 is
fink, since U1 (fink, silent) > U2 (silent, silent)
Nash Equilibrium
▶ (fink, fink) is a NE in the Prisoners’ Dilemma because finking

is a best response to the other player’s finking.
▶ We can say more: Finking is the best response to all the other
player’s strategies, fink and silent.
▶ A strategy that is a best response to any strategy the other
players might choose is called a dominant strategy.
Dominant Strategies
Dominant Strategy
A dominant strategy is a strategy si∗ for player i that is a

best response to all strategy profiles of other players. That
is, si∗ ∈ BRi (s−i ) for all s−i .
▶ If all players in a game have a dominant strategy, then we say the

game has a dominant strategy equilibrium.
▶ It is generally true for all games that a dominant strategy
equilibrium, if it exists, is also a NE and is the unique such
equilibrium.
▶ A NE strategy vs a dominant strategy: a strategy that is part of a
NE need only be a best response to one strategy profile of other
players—namely, their equilibrium strategies, whereas a dominant
strategy must be a best response not just to the NE strategies of
other players but to all the strategies of those players.
Battle of Sexes
▶ ballet = BR1 (ballet) and ballet = BR2 (ballet)

▶ boxing = BR1 (boxing ) and boxing = BR2 (boxing )
▶ There is no dominant strategy in this game
▶ There are more than one NE, namely (balet, balet) and
(boxing , boxing )
▶ It is difficult to make a firm prediction in this game.
Mixed Strategies

Mixed Strategies
▶ The strategies considered in the previous examples have a

player choose one action or another with certainty; these are
called pure strategies.
▶ In mixed strategies, the players randomly select from several
possible actions.
▶ For example, by flipping a coin.
▶ Why mixed strategies?
1. Some games have no NE in pure strategies
2. Strategies involving randomization are natural in certain setting

Mixed Strategies
▶ Suppose that player i has a set of M possible actions
Ai = {ai1 , . . . , aim , . . . aiM }.
▶ A mixed strategy is a probability distribution over the M
actions, si = {σi1 , . . . , σim , . . . σiM } , where σim is a number
between 0 and 1 that indicates the probability of player i
playing action aim .
▶ The sum of the prob. in si should be unity,
σi1 + · · · + σim + · · · σiM = 1
▶ Example in the BoS:
▶ The two players have two actions, A1 = A2 = {ballet, boxing }.
▶ Mixed strategy ( 31 , 23 ) means that the player plays ballet with
prob. 13 and boxing with prob. 23 .
▶ Several mixed strategies in the BoS: ( 13 , 23 ), ( 21 , 12 ), (0, 1), (1, 0)
▶ The first two are strictly mixed and the last two are pure
strategies

Mixed Strategies
Mixed Strategy
A mixed strategy for player i is a probability distribution,

denoted by σi , over (some of) the strategies in Si = s1 , . . . , sJ

Mixed Strategies
Example 8.2
Expected payoff in the BoS if the wife chooses the mixed strategy
( 19 , 89 ) and the husband ( 45 , 51 ). The wife expected payoff is:
1 8 4 1 1 4 1 1
U1 , , , = × × U1 (bal, bal) + × × U1 (bal, box)
9 9 5 5 9 5 9 5
8 4 8 1
+ × × U1 (box, bal) + × × U1 (box, box)
9 5 9 5
1 4 1 1 8 4 8 1
= × ×2+ × ×0+ × ×0+ × ×1
9 5 9 5 9 5 9 5
16
=
45

Computing Mixed Strategies Equilibria
▶ The key to guessing whether a game has a Nash equilibrium

in strictly mixed strategies is the surprising result that almost
all games have an odd number of Nash equilibria.
▶ In the Battle of the Sexes, we found an even number (two) of
pure-strategy Nash equilibria, suggesting the existence of a
third one in strictly mixed strategies
▶ To find the NE in strictly mixed strategies: a player will be
willing to randomize between two actions in equilibrium only if
he or she gets the same expected payoff from playing either
action or, in other words, is indifferent between the two
actions in equilibrium.

Example 8.3
▶ In BoS, suppose the husband is playing mixed strategy
(h, 1 − h), that is, playing ballet with prob. h and boxing with
prob. 1 − h.
▶ The wife’s expected payoff from playing ballet and boxing are,
respectively:
U1 (ballet, (h, 1 − h) = (h)(2) + (1 − h)(0) = 2h (4)

U1 (boxing , (h, 1 − h) = (h)(0) + (1 − h)(1) = 1 − h (5)
▶ The wife should be indifferent between ballet and boxing,

thus:
1
2h = 1 − h ⇒ h∗ = (6)
3
▶ Using the same fashion, we find w ∗ = 23
▶ Thus, the strictly mixed-strategy NE is w ∗ = 2 1
3 and h∗ = 3
▶ Notice that the wife’s indifference condition does not “pin

down” her equilibrium mixed strategy. Rather, it pins down
the husband’s mixed strategy
▶ The wife’s indifference condition cannot pin down her own
equilibrium mixed strategy because, given that she is
indifferent between the two actions in equilibrium, her overall
expected payoff is the same no matter what probability
distribution she plays over the two actions.

Continuum of Actions

Continuum of Actions
▶ Some settings are more realistically modeled via a continuous

range of actions.
▶ For example, we will study competition between strategic firms
▶ We will study competition between strategic firms. In one
model (Bertrand), firms set prices; in another (Cournot), firms
set quantities.
▶ It is natural to allow firms to choose any non-negative price or
quantity rather than artificially restricting them to just two
prices (say, $2 or $5) or two quantities (say, 100 or 1,000
units)
▶ We use the famous Tragedy of the Commons to illustrate how
we solve for NE when the game involves a continuum actions.

Tragedy of the Commons
Example 8.4
▶ Assume that two herders, i = 1, 2, decide how many sheep to

graze on the village commons. The problem is that the
commons is small and can rapidly succumb to overgrazing.
▶ qi is the number of sheep that herder i grazes on the
commons
▶ Per-sheep value (in terms of wool and milk cheese) of grazing
v (q1 , q2 ) = 120 − (q1 + q2 ) (7)
implying the value of grazing decreases as the number of

sheep increases

▶ Herder’s payoff function
U1 (q1 , q2 ) = q1 v (q1 , q2 ) = q1 (120 − q1 − q2 ) (8)

U2 (q1 , q2 ) = q2 v (q1 , q2 ) = q2 (120 − q1 − q2 ) (9)
▶ To find NE, solve herder 1’s maximization problem:
maxq1 {q1 (120 − q1 − q2 )} (10)

▶ The FOC: 120 − 2q1 − q2 = 0
▶ Rearranging the FOC to find the best response function
q2
q1 = 60 − = BR1 (q2 ) (11)
2
▶ Using the same step to find the best response function of
herder 2
q1
q2 = 60 − = BR2 (q1 ) (12)
2
▶ Inserting q2 into q1 to find the solution

q1
60 − 2
q1 = 60 − (13)
2
▶ Solving the equation, we find q1∗ = 40 and q2∗ = 40
▶ Thus, the NE is (q1∗ , q2∗ ) = (40,40)


Analysing Oligopoly using Game Theoretic
Approach

Analysing Oligopoly using Game Theoretic Approach

Analysing Oligopoly using Game Theoretic Approach
▶ We are using game theory to study short term decisions such

as pricing and output in oligopolistic markets
▶ In particular, we discuss three models:
1. Bertrand model
2. Cournot model
3. Hotelling model

Price Competition
▶ It is difficult to predict exactly the possible outcomes for price

and output when there are few firms
▶ Prices depend on how aggressively firms compete, which in
turn depends on which strategic variables firms choose, how
much information firms have about rivals, and how often firms
interact with each other in the market
▶ In Bertrand model, firms behave as though they were
perfectly competitive, setting price equal to marginal cost and
earning zero profit (point C ).
▶ In cartel model, firms as a group may act as a cartel,
recognizing that they can affect price and coordinate their
decisions (point M).
▶ Since explicit pricing coordination is often prohibited by
anti-trust law, firms collude tacitly (tacit collusion)

Price Competition

Bertrand Model of Duopoly
▶ Two firms producing perfectly substitutable goods (no
product differentiation) compete in their prices, i = 1, 2.
▶ A downward demand function is given, Q = D(p).
▶ The firms have a common marginal cost c.
▶ The firm with lower price will serve the entire market demand;
if the price is the same, each firm serves the half of it.
▶ The game is defined as follows:
▶ Players: two firms, 1, 2.
▶ Strategies: prices they will charge, pi ∈ [0; 1) for i = 1, 2.
▶ Payoffs: profits described by:

(p − c)D(pi ), if pi < p−i
 i


D(pi )
πi (pi , p−i ) = (pi − c) , if pi = p−i (14)

 2
0, if pi > p−i


The solution:
▶ In NE, each firm tries to maximize her profit given other
firm’s (equilibrium) strategy.
▶ There is a unique NE in which both firms charge the price
equal their common marginal cost, p1 = p2 = c
▶ If there are n firms, p1 = p2 = · · · = · · · = pn = c will be the
unique equilibrium.

The Proof: The Bertrand NE is shown by the following steps:
1. Charging different prices (by firms) never becomes a NE

▶ Does any firm have a (strict) incentive to deviate?
2. Charging the same price other c also fails to be an equilibrium
▶ For each of the first 5 cases, at least one firm has a profitable
deviation:
Case 1: p1 > p2 > c
Case 2: p1 = p2 > c
Case 3: p1 > c ≥ p2
Case 4: c > p1 ≥ p2
Case 5: p1 = c > p2
Case 6: p1 = p2 = c ⇒ no profitable deviation! A unique NE!

Note:
▶ To show that something is an equilibrium: Show that there is
NO profitable deviation.
▶ To show that something is NOT an equilibrium: Show that
there is ONE profitable deviation

Bertrand Paradox
▶ Surprising result of Bertrand Competition ⇒ Bertrand

Paradox
▶ Marginal cost pricing
▶ Two firms are enough to guarantee perfect competition!
▶ In reality, there are many industries that look suitable for the
Bertrand model but prices are (much) higher than marginal
cost (e.g. market for mobile internet, price wars between PC
makers).
▶ There are at least three explanations which can reasonably
resolve this Bertrand paradox:
1. Product differentiation
2. Capacity Constraint
3. Dynamic interaction (i.e. collusion or cartel)

Cournot Model of Duopoly
Example 15.1 & 15.2
▶ Two firms, i = 1, 2, producing perfectly substitutable goods
(no product differentiation) compete in their quantities.
▶ Each firm chooses its out put, qi , simultaneously.
▶ Total market output: Q = q1 + q2
▶ A (inverse) linear demand function is given, P(Q) = a − Q.
▶ A market demand is downward sloping, so the inverse demand
is also downward sloping P ′ (Q) < 0
▶ The firms have a common marginal cost c, thus Ci (qi ) = cqi .
▶ The game is defined as follows
1. Players: two firms, i = 1, 2
2. Strategies: quantities they will produce, qi ∈ [0; 1) for i = 1, 2.
3. Payoffs: profits described by
πi = P(Q)qi − Ci (qi ) (15)

πi = [a − (q1 + q2 ) − c]qi , for i = 1, 2 (16)

▶ How can we derive a NE of this game?

▶ In a NE, each firm tries to maximize her profit given other
firm’s (equilibrium) strategy:
maxqi πi (17)
maxqi [a − (q1 + q2 ) − c]qi , for i = 1, 2 (18)
or for each firm:
For firm 1: maxq1 [a − (q1 + q2 ) − c]q1 (19)

For firm 2: maxq2 [a − (q1 + q2 ) − c]q2 (20)

▶ Using FOCs to solve the best-response function
dπ1
For firm 1: = a − q1 − q2 − c − q1 = 0 (21)
dq1
a − q2 − c
BR1 (q2 ) = q1 = (22)
2
dπ2
For firm 2: = a − q1 − q2 − c − q2 = 0 (23)
dq2
a − q1 − c
BR2 (q1 ) = q2 = (24)
2
a − q−i − c
or generally, BRi (q−i ) = qi = (25)
2

▶ Solving the best response functions yields the NE:

a−c
q1∗ = q2∗ = (26)
3
2
▶ Total market output: Q = q1 + q2 = (a − c)
3
1
▶ Profit for each firm: π1∗ = π2∗ = (a − c)2
9
2
▶ Total market profit: Π = π1 + π2∗ = (a − c)2
∗ ∗
9


Cournot with n number of firms
Example 15.3
▶ Now consider Cournot model with a variable n of firms, so
P
that Q = qi . The maximization problem becomes:
X
maxqi [a − (qi + q−i ) − c]qi (27)
P
where q−i = Q − qi .
▶ Finding FOC to solve the best response functions:

dπi X
= a − 2qi − q−i − c = 0 (28)
qi
P ∗
▶ Imposing symmetry: q−i = Q ∗ − qi∗ = (n − 1)qi∗
a − 2qi∗ − (n − 1)qi∗ − c = 0
a − (n + 1)qi∗ − c = 0
a−c
qi∗ = (29)
n+1
Cournot with n number of firms
▶ Market Price:
1 n
P = a − Q = a − nqi∗ = a+ c (30)
n+1 n+1
▶ Total market output
n
Q ∗ = nqi∗ = (a − c) (31)
n+1
▶ Total profit for all firms:
n(a − c) a − c a − c 2
Π∗ = nπi∗ = n a− −c =n (32)
n+1 n+1 n+1
▶ Setting n = 1 gives the monopoly outcomes whereas setting
n = ∞ gives the competitive market outcomes.

Prices vs Quantities
▶ Price and quantity are such different strategic variables.
▶ Price competition is “tougher”:
▶ A small reduction in one firm’s price allows it to steal all the
market demand.
▶ A small increase in one firm’s quantity has only a marginal
effect on the revenue that other firms receive from their
existing output.
▶ Firms have less of an incentive to outproduce each other with
quantity competition than to undercut each other with price
competition
▶ Cournot has a more realistic implication
▶ Cournot: the industry grows more competitive as the number
n of firms increases from monopoly to perfect competition.
▶ Bertran:there is a discontinuous jump from monopoly to
perfect competition if just two firms enter, and additional entry
beyond two has no additional effect on the market outcome.
▶ In real-world markets, firms tend to set prices rather than
quantities ⇒ reinterpret quantity to capacity
Prices vs Quantities
▶ Cournot and Bertrand are two different games, but we do not

need different solution concepts.
▶ The single solution concept (Nash equilibrium) can explain
different market outcomes depending on the situations.
▶ In other words, we do not need different assumptions about
firms’ behaviors. Once a model is specified, then Nash
equilibrium gives us the result of the game.

Bertrand Model with Product Differentiation
Example 15.4
▶ Consider the Bertrand duopoly model of differentiated
products
▶ Demand for each firm:
qi = a − pi + bpj , for i = 1, 2, i ̸= j (33)
where 0 < b < 2

▶ The firms have different marginal costs c1 and c2 , respectively
▶ In a NE, each firm tries to maximize its profit given other
firm’s (equilibrium) strategy.
maxpi πi
maxpi (pi − ci )(a − pi + bpj ) (34)

▶ Finding FOC to solve the best response functions:
dπi
= a − 2pi + bpj + ci = 0 (35)
pi
a + ci bpj
BRi (pj ) = pi = + , for i = 1, 2, i ̸= j (36)
2 2
or for each firm: (37)
a + c1 bp2
BR1 (p2 ) = p1 = + (38)
2 2
a + c2 bp1
BR2 (p1 ) = p2 = + (39)
2 2
▶ Since the best reply is upward sloping, it shows strategic
complementarity.

▶ Solving the two equations we get the NE prices:
a 2c1 + bc2
p1∗ = + (40)
2 − b (2 − b)(2 + a)
a 2c2 + bc1
p2∗ = + (41)
2 − b (2 − b)(2 + a)

Hotelling Model
Example 15.5
▶ Identical products are differentiated because of the location of
the supplier
▶ Two ice cream stands are located along a beach. The length
of the beach is normalized to unity
▶ Each store has to decide the location between 0 and 1.
▶ Customers are located uniformly along the beach, and each
customer goes to the nearest stand.
▶ If both stands choose the same location, each receives half of
the customers.
▶ Each store maximizes the number of customers

Hotelling Model
▶ The game is defined as follows:

▶ Players: Two stands, i = 1, 2
▶ Strategies: stands location along the beach, si ∈ [0, 1] for
i = 1, 2.
▶ Payoffs: the number of customers described by:
s + s
 1 2
, if si ≤ s−i
ui (si , s−i ) = 2 (42)
1 − s 1 + s 2
, if si > s−i
2

Hotelling Model
▶ There is a unique Nash equilibrium where both shops open at

the middle, (0.5, 0.5), which is shown by the following three
steps:
▶ Choosing separate locations never becomes a NE.
▶ Choosing the same location other than the middle point also
fails to be a NE.
▶ If both shops choose the middle, then no one has an incentive
to change the location.

Game Theory

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Game Theory

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Matriculation course: Microeconomics

Lecture 5. Introduction to game theory

Updated August 19, 2021

Alfa Farah Matriculation course: Microeconomics 1/1

Alfa Farah Matriculation course: Microeconomics 2/1

▶ Oligopoly falls between the extremes of perfect competition

Alfa Farah Matriculation course: Microeconomics 3/1

Alfa Farah Matriculation course: Microeconomics 4/1

Alfa Farah Matriculation course: Microeconomics 5/1

▶ Game theory is a formal tool used to understand the strategic

Alfa Farah Matriculation course: Microeconomics 6/1

Thomas Schelling Robert Aumann

Alvin E. Roth Lloyd Shapley Jean Tirole

Alfa Farah Matriculation course: Microeconomics 8/1

▶ Two tasks involved when using game theory to analyse

Alfa Farah Matriculation course: Microeconomics 9/1

▶ A game is an abstract model of a strategic situation.

Alfa Farah Matriculation course: Microeconomics 10 / 1

Basic notations used in game theory.

Alfa Farah Matriculation course: Microeconomics 11 / 1

Alfa Farah Matriculation course: Microeconomics 12 / 1

▶ A (non-cooperative) game can be formalized in two different

Alfa Farah Matriculation course: Microeconomics 13 / 1

Alfa Farah Matriculation course: Microeconomics 14 / 1

si is a best response for player i to rivals’ strategies s−i ,

Ui (si , s−i ) ≥ Ui (si′ , s−i ) for all si′ ∈ Si . (1)

Alfa Farah Matriculation course: Microeconomics 15 / 1

A Nash equilibrium is a strategy profile (s1∗ , s1∗ , . . . , sn∗ ) such

A simple example in two players game:

U1 (s1∗ , s2∗ ) ≥ U1 (s1 , s2∗ ) for all s1 ∈ S1 (2)

Alfa Farah Matriculation course: Microeconomics 16 / 1

The NE is (fink, fink)

▶ (fink, fink) is a NE in the Prisoners’ Dilemma because finking

A dominant strategy is a strategy si∗ for player i that is a

▶ If all players in a game have a dominant strategy, then we say the

▶ ballet = BR1 (ballet) and ballet = BR2 (ballet)

Alfa Farah Matriculation course: Microeconomics 21 / 1

▶ The strategies considered in the previous examples have a

Alfa Farah Matriculation course: Microeconomics 22 / 1

Alfa Farah Matriculation course: Microeconomics 23 / 1

A mixed strategy for player i is a probability distribution,

Alfa Farah Matriculation course: Microeconomics 24 / 1

Alfa Farah Matriculation course: Microeconomics 25 / 1

▶ The key to guessing whether a game has a Nash equilibrium

Alfa Farah Matriculation course: Microeconomics 26 / 1

U1 (ballet, (h, 1 − h) = (h)(2) + (1 − h)(0) = 2h (4)

▶ The wife should be indifferent between ballet and boxing,

▶ Notice that the wife’s indifference condition does not “pin

Alfa Farah Matriculation course: Microeconomics 28 / 1

Alfa Farah Matriculation course: Microeconomics 29 / 1

▶ Some settings are more realistically modeled via a continuous

Alfa Farah Matriculation course: Microeconomics 30 / 1

▶ Assume that two herders, i = 1, 2, decide how many sheep to

v (q1 , q2 ) = 120 − (q1 + q2 ) (7)

implying the value of grazing decreases as the number of

Alfa Farah Matriculation course: Microeconomics 31 / 1

U1 (q1 , q2 ) = q1 v (q1 , q2 ) = q1 (120 − q1 − q2 ) (8)

maxq1 {q1 (120 − q1 − q2 )} (10)

▶ Inserting q2 into q1 to find the solution

Alfa Farah Matriculation course: Microeconomics 33 / 1

Alfa Farah Matriculation course: Microeconomics 34 / 1

Alfa Farah Matriculation course: Microeconomics 35 / 1

Alfa Farah Matriculation course: Microeconomics 36 / 1