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An example using the mathematics: Two possibilities: driving on the highway or the local roads. Local roads take 45 Minutes. Highway, uncongested, takes 15 minutes. Each additional driver on the highway adds 0.005 minutes of driving time to the driving time on the highway for all. Let s(n) be the choice to drive on the local roads and p(n) be the choice to drive on the highway. We measure the benefit to individuals as time saved relative to some level (1 hour).
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An example using the mathematics: Because we measure the benefit to individuals as time saved relative to some level (1 hour). Thus for local roads, the payoff is a constant: s(n) = 60 - 45 = 15 For highway: p(n) = 60 15 0.005n = 45 0.005n For the individual to be indifferent between travelling on the highway or the local road, p(n+1) = s(n) *alternatively: 45 0.005(n+1) = 15 p(n)=s(n) 0.005n = 29.995 45 0.005n=15 n= 29.995/(0.005) = 5999 0.005n=30 n=30/0.005 = 60003

An example using the mathematics: MSG = T(n+1) - T(n) = 45 - (n+1)(0.005) - 15 - 0.005n = 29.995 - 0.01n From the perspective of society, we want to maximise total social benefit, and hence that will be where marginal social gain, is zero:

T(n+1) - T(n)= MSG = 0 29.995 0.01n = 0 n = 2 999.5 n = 3000 (approximately)


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An example using the mathematics: Alternatively, consider T(n) Take first order conditions with respect to n.

An example using the mathematics: Society: n = 3000 Individuals: n = 6000 (equilibrium) Therefore the number for the maximum private gain is different to maximum social gain and this is where we see how self-interest and the social benefit can dramatically differ

Graphically

An example using the mathematics:

Payoff 45

p(n)=45-0.005n

E 15

s(n)=15

15

0 n*= 3000 nE= 6000 n=9000

N-1
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An example using the mathematics:

Payoff 45 p(n)=45-0.005n

E 15

s(n)=15 15

0 n N-1
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An example using the mathematics: If you start with 8000 drivers choosing to drive on either the local road or the highway: How many will drive on local roads? 2000 will drive on the local roads and 6000 on the highway, what would you chose? Looking at it another way, assume there are already 4000 drivers on the highway: p(n) = 45 0.005(4000) = 25 p(n+1) = 45 0.005(4001) = 24.995 Thus if s(n) = 15 any individual may choose to switch from the local roads (Shirk) to the highway (Participate) Your marginal private gain is: p(n+1) s(n) = 24.995 15 = 9.995 Society?

An example using the mathematics: But the payoff isnt only to you, the other drivers lose: p(n) p(n+1) = -0.005 Your switch doesnt alter the payoffs to those on the local road. Moreover, the cumulative effect on all the drivers from your (one) switch totals in at: 4000(-0.005) = -20 Thus the marginal social gain from you switching is: T(n+1) - T(n) = 9.995 20 = -10.005 T(n+1) - T(n) < 0

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An example using the mathematics:

Payoff 45

p(n)=45-0.005n

E 15 MPG>0 MSG>0 MSE>=0 n*= 3000 MPG>0 MSG<0 MSE<0 nE= 6000

s(n)=15 MPG<0 MSG<0 MSE<=0

15

n=9000

N-1
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Comment on the mathematics: Here weve assumed continuous and differentiable functions for s(n), p(n) and therefore T(n) This is related to us assuming representative agents whose utilities we can play with in this way, else our lives would be a lot more difficult The method that contrasts T(n) with T(n+1) does not require use to have differentiable functions For example, they could be step-wise
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Questions: Jack and Jill are playing a game that has certain outcomes indicated by letters. Their ordinal utility functions are given below: Jack (Player 1) 4A 3C 2B 1D Jill (Player 2) 4B 3C 2A 1D Comment

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Questions: Determine which of the following situations describe games and which describe decisions. In each case, indicate what specific features of the situation caused you to classify it as you did. 1. Youre wandering around Jammie Plaza during orientation week. You are approached by different groups to join their charity organizations. You need to choose whether to join and what to join. 2. You are kept awake one night by your neighbours loud music. You consider calling and asking her to turn it down. Then again, next week youre hosting a party and youll be playing music for most of the night.
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Questions: Consider the strategic game described below. For each game discuss whether i) the moves are sequential or simultaneous, ii) the outcomes are zero-sum or not, iii) the game is repeated or oneshot, and iv) players have complete or incomplete information. 1. Snake-Water-Gun: A game from India in which Snake drinks Water, Water douses Gun and Gun shoots Snake. People form the symbols for the game with their hands at the same time and the person with the symbol that beats the other wins. If both players have the same symbol they repeat until a winner results.
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Questions: TRUE OR FALSE


With iterative elimination of strictly dominated strategies, we always arrive at a unique equilibrium. With iterative elimination of strictly dominated strategies we may eliminate a potential Nash equilibrium. Using the best response method, you are guaranteed to find a Nash Equilibrium. An expected payoff is the average of the payoffs from the situations that may occur given certain strategies are played. A Pareto superior outcome is not always a NE
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Questions: Given the payoff table X Y W a, b c, d Z e,f g,h

What is the simplest condition that must hold for (Y, Z) to be a NE? A. g>e and h>f B. g>c and h>d C. g>e and h>d D. ge and hd E. g>e and h>d and c>a and f>b
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