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a) What is a game?
The objective of this paper is to give the definition of a game. In doing so, the writer shall
start by defining the term game and hence exemplify and therefore shall summarize.
A game is formal representation of a situation in which a number of individuals interact in
a strategic way, given a set of rules that of rules that the players are obliged to adhere to.
For it to be classified as a game, the outcomes must be predetermined or known. According
to Rasmusen (2001), a game is a formal model of an interactive situation which involves
players, their preferences, information, and strategic actions available and how they
influence the outcome.
An example of a game, assuming that there exist two players, Ray and Kay. They choose
to bat that if they toss a coin and the result comes out as a head, Ray will give Kay a dollar
and otherwise, Kay will give Ray a dollar. The outcome of this game is that either Ray will
give a dollar to Kay or otherwise. The rules are that a third party will toss a coin and that
no one is allowed to have a conversation with the third party. Therefore, the results or
outcomes of this game are known that it will either be a head or a tail though the laws of
probability ill determine the actual outcome.
Therefore, a game is a strategic setup that allows players to interact being governed by a
set of rules while allowing their rationality to take play.
b) State the assumptions of the game theory [5]
In this section, the writer shall state and briefly explain the assumptions of the game theory.
Game theory assumes that each player has perfect information on his strategy and seeks to
maximize his personal payoffs. In any given game, each player knows the results that
would be yielded by his actions, but there exist uncertainty on what his actions might
trigger. In economic analysis, it is important to consider how other players would retaliate.
According to Myerson (1997), game theory assumes that a decision maker is rational, he
makes decisions consistently in pursuit of his personal objectives. He adds on to say that
the idea of a rational decision maker is that he seeks to maximize his utility in the form of
payoffs. Therefore, game theory is based on the assumption that all the players are rational
decision makers.
In addition, game theory also assumes that economic agents are rational. This entellus that
economic agents make well informed decisions that maximize their returns that seek to
maximize their payoffs.
Furthermore, another assumption of this theory is that each player chooses a strategy that
maximizes his personal payoff. Players are payoff maximizers and they need outcomes that
are desirable to them.
Lastly, payoffs depend on the actions of a player and the decisions of other players. For
example, in a duopoly situation, if one player chooses to advertise his products, the result
might be that consumers will purchase those products that would have been advertised.
Therefore, the other player would retaliate by also advertising hence leading to the previous
conditions being restored. The final result would be that both players would lose money
that is limited to the advertising costs. This concept is explained as the payoff matrix for
advertising.
c) Outline the properties of the Nash equilibrium [5]
An equilibrium is a state of rest where there is no incentive for change. This piece of paper’s
major objective is to outline the main properties of the Nash equilibrium. In doing so, the
