Answered: Game theory is a very useful tool for…

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter17: Oligopoly

Section17.2: The Economics Of Cooperation

Problem 2QQ

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Game theory is a very useful tool for managers and it can help them to solve business decisions. But at the same time it is important to be careful about rival decisions to avoid any loss. Usually the best solution is to engage in strategic interaction is the best secure way to play. Highlight that how to play a secure game or dominant to survive in the market for the long term.

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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Game theory is the study of mathematical models of rational agents' strategic interactions. Real-world scenarios for situations such as pricing competition and product releases can be laid out and their outcomes predicted using game theory.

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