Comprehensive Study Guide: Game Theory
& Behavioral Economics
Based on Intermediate Microeconomics by Hal R. Varian
Contents
1 Introduction 2
2 Game Theory (Chapter 29) 2
2.1 Elements of a Game . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Dominant Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Nash Equilibrium (NE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 The Prisoner’s Dilemma . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.5 Mixed Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3 Game Applications (Chapter 30) 3
3.1 Sequential Games (Extensive Form) . . . . . . . . . . . . . . . . . . . . . 3
3.2 Coordination Games . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.3 Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4 Behavioral Economics (Chapter 31) 4
4.1 Framing Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.2 Uncertainty and Probability . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.3 Time Discounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.4 Fairness and Social Norms . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5 Conclusion 5
1
, Intermediate Microeconomics Study Guide: Strategic Behavior
1 Introduction
While standard microeconomics assumes agents treat prices as given (perfect compe-
tition) or control them (monopoly), Game Theory analyzes situations of strategic
interaction. Here, the outcome for one person depends not just on their own actions,
but on the actions of others.
Behavioral Economics relaxes the assumption of perfect rationality, incorporating
insights from psychology to explain how real people make economic decisions.
2 Game Theory (Chapter 29)
2.1 Elements of a Game
To describe a game, we need three elements:
1. Players: Who is involved (e.g., Row and Column).
2. Strategies: The plan of action available to each player.
3. Payoffs: The utility/profit resulting from every possible combination of strategies.
This is often represented in a Payoff Matrix (Normal Form).
2.2 Dominant Strategies
A strategy is Dominant if it yields a strictly higher payoff than any other strategy,
regardless of what the other player does.
• If both players have a dominant strategy, the outcome is a Dominant Strategy
Equilibrium.
• This is the strongest form of prediction in game theory, but it rarely happens in
complex games.
2.3 Nash Equilibrium (NE)
Since dominant strategies are rare, we use the Nash Equilibrium concept.
2
& Behavioral Economics
Based on Intermediate Microeconomics by Hal R. Varian
Contents
1 Introduction 2
2 Game Theory (Chapter 29) 2
2.1 Elements of a Game . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Dominant Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Nash Equilibrium (NE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 The Prisoner’s Dilemma . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.5 Mixed Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3 Game Applications (Chapter 30) 3
3.1 Sequential Games (Extensive Form) . . . . . . . . . . . . . . . . . . . . . 3
3.2 Coordination Games . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.3 Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4 Behavioral Economics (Chapter 31) 4
4.1 Framing Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.2 Uncertainty and Probability . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.3 Time Discounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.4 Fairness and Social Norms . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5 Conclusion 5
1
, Intermediate Microeconomics Study Guide: Strategic Behavior
1 Introduction
While standard microeconomics assumes agents treat prices as given (perfect compe-
tition) or control them (monopoly), Game Theory analyzes situations of strategic
interaction. Here, the outcome for one person depends not just on their own actions,
but on the actions of others.
Behavioral Economics relaxes the assumption of perfect rationality, incorporating
insights from psychology to explain how real people make economic decisions.
2 Game Theory (Chapter 29)
2.1 Elements of a Game
To describe a game, we need three elements:
1. Players: Who is involved (e.g., Row and Column).
2. Strategies: The plan of action available to each player.
3. Payoffs: The utility/profit resulting from every possible combination of strategies.
This is often represented in a Payoff Matrix (Normal Form).
2.2 Dominant Strategies
A strategy is Dominant if it yields a strictly higher payoff than any other strategy,
regardless of what the other player does.
• If both players have a dominant strategy, the outcome is a Dominant Strategy
Equilibrium.
• This is the strongest form of prediction in game theory, but it rarely happens in
complex games.
2.3 Nash Equilibrium (NE)
Since dominant strategies are rare, we use the Nash Equilibrium concept.
2
