Answered: ame Theory. Consider the following…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Game Theory.

Consider the following scenario: Two cloth manufacturing companies, A and B. Firm A designs a few costumes, and they are confident enough that they will be sold quickly in the market, but after launching their designs, they make very little profit due to a lack of capital to promote their designs. Now firm B uses these designs and makes a significant profit due to its brand value.

1. Demonstrate that the situation IS a game (explain strategic interaction/conflict).

Definition Definition Economic decision-making framework that analyzes how different players optimize their outcomes with given pay-offs corresponding to their available strategies. The assumptions of game theory are: The number of players or competitors are finite/limited; All participants are rational The rules of the game are known to every player; and Each participant has a finite set of actions. A common way in which game theory is presented as an ( m x n ) matrix in which m represents the strategies of row player and n represents the strategies of column player. There are several limitations of game theory: Many businesses have a large number of competitors, and selecting an optimal strategy in these circumstances is difficult; Real-life business operating environments are full of uncertainty and difficult to model as a game theory; and The assumption of rationality and utility maximization isn't always an accurate portrayal of human nature.

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