Game Theory 3
1. An effective threat is cheaper than an effective promise. Explain why this is true. Provide a specific example. (An essay of 100 words; with a typical font and spacing this will be about 1/2 page) 2.In the Tiny Poker game at the end of the lecture, each player has two different information sets and strategies. Remember that an information set is the information you have available to you at the time you make your decision, and a strategy must tell you what to do given each information set. Describe the two information sets, and suggest two strategies. (An essay of 250 words; with a typical font and spacing this will be about 1 page) 3. How does the concept of moral hazard apply to the bailout of private corporations by the government? What other applications can you think of? (An essay of 250 to 350 words; with a typical font and spacing this will be about 1 to 1-1/2 pages)
Game Theory
Name:
Course:
Professor:
Date Due:
Q.1
An effective threat is cheaper than an effective promise. Explain why this is true.
Stevens has highlighted the “strategic moves to be threats, promises or commitments” (p. 34). An effective threat has been seen to be cheaper as compared to an effective promise in strategic moves. With an effective threat, the negative payoff befalls the second party player if he fails to adhere to the conditions set by the first player. In this case, there is no compromise and one does not have to do things they do not wish to do. On the other hand, an effective promise is quite conditional (Stevens, 2008, p.34). You only happen to get better payoff, only if you make a choice of doing something that was not at the top of your list. This means that effective promise comes with a lot of attachments as compared to effective threats hence making them quite inconvenient at times.
Q.2
In the Tiny Poker game at the end of the lecture, each player has two different information sets and strategies. Remember that an information set is the information you have available to you at the time you make your decision, and a strategy must tell you what to do given each information set.
Describe the two information sets, and suggest two strategies
In the Tiny poker game which is a case of imperfect information, the two players are lacking in the full information, hence making it a case of information asymmetry. However, for a player to make a move, it has to be based on the information set they hold. This is what will dictate the strategy they employ.
The following are the main information sets the player has:
The deck contains only 3 cards. Out of these cards, each player has a share of only one card that they can take from the deck at a time or per game.
The players are also expected to place some money into the kitty, which the game will be rotating round. In this case, each player will be aiming to win the highest amount from the kitty hence helping them to make their move.
With the base line information, the player will develop the appropriate strategies:
The first strategy will ...