Microeconomics, Module 16, “The Theory of Games”

Micro module 16: Readings for tenth edition

(The attached PDF file has better formatting.)

{The Landsburg textbook is excellent. We say to read certain sections and to skip others. This does not mean that certain sections are better; it means that the homework assignments and exam problems are based on the sections that you must read for this course. Some skipped sections are fascinating but are not tested.}

Read the introduction and section 12.1. Focus on Nash equilibrium, Pareto optimality, and dominant strategy, which are discussed several times in this section. Know well the prisoner’s dilemma game for the final exam. The text uses several games to show the relations of dominant strategies to the possible outcomes (pigs in a box, battle of the sexes, and copycat games). A final exam problem may ask how many Nash equilibria or Pareto optima exist in a scenario.

Sometimes Landsburg finds an intriguing theory that is simply wrong. He refers to an article that explains city differences in auto rates by a complicated game. This is nonsense. Prices are proportion to loss costs plus expenses, which depend on a host of factors. Uninsured motorists contribute to a small degree; other items are more important.

Read section 12.2. Insurers continually change pricing and marketing strategies in response to competitors’ actions, so the analysis is a mix of sequential and non-sequential games.

Read the summary at the end of the chapter.

Review end of chapter problems 1, 2, 3, 4, 5. Eight game matrices and six questions (#3 has two parts) gives 48 questions. Spend an hour working through the logic of these items. After a few games, the reasoning is clear. The final exam gives a similar game matrix. These questions are not easy; it takes time to master the reasoning. The final exam problem is a version of the Jack and Jill game matrix, though with different payoffs.