Finance 30210: Managerial EconomicsThe Basics of Game TheoryWhat is a Game?Prisoner’s Dilemma…A Classic!JakeTwo prisoners (Jake & Clyde) have been arrested. The DA has enough evidence to convict them both for 1 year, but would like to convict them of a more serious DA puts Jake & Clyde in separate rooms and makes each the following offer:?Keep your mouth shut and you both get one year in jail?If you rat on your partner, you get off free while your partner does 8 years?If you both rat, you each get 4 (Normal) FormJakeClydeConfessDon’t ConfessConfess -4-4 0-8Don’t Confess-80 -1-1Jake is choosing rows Clyde is choosing columnsJakeClydeConfessDon’t ConfessConfess -4-4 0-8Don’t Confess-80 -1-1Suppose that Jake believes that Clyde will confess. What is Jake’s best response?If Clyde confesses, then Jake’s best strategy is also to confessJakeClydeConfessDon’t ConfessConfess -4-4 0-8Don’t Confess-80 -1-1Suppose that Jake believes that Clyde will not confess. What is Jake’s best response?If Clyde doesn’t confesses, then Jake’s best strategy is still to confessJakeClydeConfessDon’t ConfessConfess -4-4 0-8Don’t Confess-80 -1-1Dominant StrategiesJake’s optimal strategy REGARDLESS OF CLYDE’S DECISION is to confess. Therefore, confess is a dominant strategy for JakeNote that Clyde’s dominant strategy is also to confessNash EquilibriumJakeClydeConfessDon’t ConfessConfess -4-4 0-8Don’t Confess-80 -1-1The Nash equilibrium is the e (or set of es) where each player is following his/her best response to their opponent’s movesHere, the Nash equilibrium is both Jake and Clyde confessingThe Prisoner’s DilemmaJakeClydeConfessDon’t ConfessConfess -4-4 0-8Don’t Confess-80 -1-1The prisoner’s dilemma game is used to describe circumstances petition forces sub-optimal esNote that if Jake and Clyde can collude, they would never confess!“Winston tastes good like a cigarette should!”“Us Tareyton smokers would rather fight than switch!”AdvertiseDon’t AdvertiseA
