Chapter 16, Part 2

• What are the four elements of a game in Game Theory?

  1. Players, 2. Strategies available to each player, 3. Information available to each player when choosing strategies, 4. Payoffs for all possible strategy combinations
• What assumptions are made in Game Theory?

  1. Players know the game rules, 2. Players act rationally to maximize payoffs, 3. Players can calculate the best actions to maximize payoffs
• What are the types of games in Game Theory?

  Simultaneous Move Games and Sequential Move Games
• Define Simultaneous Move Games.

  Games where players choose actions at the same time without knowing others' choices (e.g., Prisoners' dilemma, sealed-bid auctions).
• Define Sequential Move Games.

  Games where players make decisions one after another, knowing the previous actions (e.g., chess, negotiations).
• Explain the Prisoners' Dilemma.


  A scenario where two prisoners must decide whether to confess or remain silent, with outcomes depending on the other's decision, often leading to non-cooperation despite mutual benefits.
• What is a Dominant Strategy?


  A strategy that is best for a player regardless of what the other players do.
• Define Nash Equilibrium.


  An outcome where no player can benefit by unilaterally changing their strategy, given the strategies of others.
• What is a Payoff Matrix?

  A table that represents the outcomes in strategic games for each combination of strategies chosen by the players.
• Describe a Game Tree.

  A diagram used for sequential games to show the decision-making process step by step.
• How do you identify a Dominant Strategy in a payoff matrix?

  By finding a strategy that provides a higher payoff for a player no matter what the other players choose.
• What is backward induction in the context of game theory?


  A method used to solve sequential games by analyzing the game from the end and moving backwards to determine optimal strategies.
• What is the significance of Nash Equilibrium in Game Theory?

  It represents a stable state where players' strategies are the best responses to each other, and no player has an incentive to deviate.
• Give an example of a real-world application of Game Theory.

  Business decisions, auctions, negotiations, and international relations can all be analyzed using game theory concepts.
• What are the key tools provided by Game Theory for analyzing strategic interactions?

  Payoff matrices, game trees, dominant strategies, and Nash equilibria.
• What should you practice to ace your exam on Game Theory?

  Drawing payoff matrices, creating game trees, identifying dominant strategies, and calculating Nash equilibria.