Microeconomics (ECON0013) - Formulas, De�nitions and FAQs
Study online at https://quizlet.com/_cjbxvx
1. What is a strictly dominant strategy?: A strategy which always provides a greater payo� when
compared to other strategies (cannot provide an equal payo�; that would be weakly dominant).
2. What is a weakly dominant strategy?: A strategy which provides a greater than or equal payo� to
other strategies. (Think of it as greater than or equal to)
3. What is a pure strategy nash equilibrium?: A nash equilibrium which arises from playing a
speci ed strategy (I will play this action speci cally) which results in an outcome where no player in the game wants to
switch their strategy (holding the strategy of the other player(s) constant).
4. What is a mixed strategy nash equilibrium?: A nash equilibrium which arises from playing
all action available to a player with a certain probability (I will player action A with probability 3/5 and action B with
probability 2/5) which resolves to a game settup where each player would not change the probabilities they picked.
5. What is the underlining method?: Where we pick the best row for each column and the best column
for each row (in terms of payo�). If payo�s are equal, underline both:
6. How do you �nd a mixed strategy nash equilibrium? (2x2 game): - Assign each row
a probability (p and 1-p) and each column a probability (q and 1-q).
- Multiply the payo�s for that row/column by the probability of the column/row.
- Make sure that both expressions for each row and each column equal each other.
- Find the values of p and q respectively and you're all done :)
7. How do you �nd the intersection of best responses? (Chapter 1, Generalised
Method): - Start by nding both functions you'll be using.
- Partially di�erentiate both with respect to the variable the individual can control. This should give you an equation in
terms of both variables.
- Find the intersection of the two equations you have derived. This is the nash equilibrium.
8. What is a pareto dominant nash equilibrium?: A nash equilibrium which provides the best
possible outcome of the game. In this case, the nash equilibrium is (Stag, Stag) because it provides the highest payo�
overall:
9. What is a risk dominant nash equilibrium?: A nash equilibrium which provides the least risky
outcome of the game (a stable outcome). In this case, the nash equilibrium is (Rabbit, Rabbit) because it is the least
risky option for players to play (as if the other player changes their strategy, they're still ne):
10. What is a focal point?: A focal point is an action that is more prominent due to past information. For
example, if I buy lunch from Tesco every day then, in a game where I pick where to have lunch, Tesco will be the focal
point of the game.
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, Microeconomics (ECON0013) - Formulas, De�nitions and FAQs
Study online at https://quizlet.com/_cjbxvx
11. What is a perfect information extensive form game?: A perfect information game must
contain no information sets (meaning all players know the actions that were played before them). It must also ful l the
properties of a standard extensive form game:
- The game must have a unique initial node.
- The game must have a unique path from the initial node to every successive node.
- Each node must be labelled with the player making the action at that node (if the action is the result of a randomiser,
then label the node 0).
- Each ending point in the game must be labelled with the relevant payo�.
Here is an example:
12. What is an imperfect information extensive form game?: An imperfect information
game must contain an information set (meaning that players do not know about actions played before them. It must
also ful ll the properties of standard extensive form game. Here's an example:
13. What is a non-credible threat?: A non-credible threat is a threat where the person being threatened
does not believe that the threat will be carried out.
For example, in the game pictured, we know this threat isn't credible because player 2 is playing a strategy that is worse
for them:
14. What is a credible threat?: A credible threat is a threat where the person being threatened believes it
will be carried out.
For example, in the game pictured, we know this threat is credible because it is within player 2's best interest to carry
it out:
15. What is backwards induction?: A process only used in perfect information games where payo�s are
compared bottom-up.
We start with the nodes further down in the game and nd which one is best for the respective player to play. Then
we continue upwards, using the payo�s decided on by lower nodes. We repeat this process until we reach the initial
node.
This process will always produce a nash equilibrium in a perfect information game:
16. What is a nash equilibrium?: A set of strategies (pure or mixed) which result in an outcome where
no player want to change their strategy (holding the strategies of other players constant).
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Study online at https://quizlet.com/_cjbxvx
1. What is a strictly dominant strategy?: A strategy which always provides a greater payo� when
compared to other strategies (cannot provide an equal payo�; that would be weakly dominant).
2. What is a weakly dominant strategy?: A strategy which provides a greater than or equal payo� to
other strategies. (Think of it as greater than or equal to)
3. What is a pure strategy nash equilibrium?: A nash equilibrium which arises from playing a
speci ed strategy (I will play this action speci cally) which results in an outcome where no player in the game wants to
switch their strategy (holding the strategy of the other player(s) constant).
4. What is a mixed strategy nash equilibrium?: A nash equilibrium which arises from playing
all action available to a player with a certain probability (I will player action A with probability 3/5 and action B with
probability 2/5) which resolves to a game settup where each player would not change the probabilities they picked.
5. What is the underlining method?: Where we pick the best row for each column and the best column
for each row (in terms of payo�). If payo�s are equal, underline both:
6. How do you �nd a mixed strategy nash equilibrium? (2x2 game): - Assign each row
a probability (p and 1-p) and each column a probability (q and 1-q).
- Multiply the payo�s for that row/column by the probability of the column/row.
- Make sure that both expressions for each row and each column equal each other.
- Find the values of p and q respectively and you're all done :)
7. How do you �nd the intersection of best responses? (Chapter 1, Generalised
Method): - Start by nding both functions you'll be using.
- Partially di�erentiate both with respect to the variable the individual can control. This should give you an equation in
terms of both variables.
- Find the intersection of the two equations you have derived. This is the nash equilibrium.
8. What is a pareto dominant nash equilibrium?: A nash equilibrium which provides the best
possible outcome of the game. In this case, the nash equilibrium is (Stag, Stag) because it provides the highest payo�
overall:
9. What is a risk dominant nash equilibrium?: A nash equilibrium which provides the least risky
outcome of the game (a stable outcome). In this case, the nash equilibrium is (Rabbit, Rabbit) because it is the least
risky option for players to play (as if the other player changes their strategy, they're still ne):
10. What is a focal point?: A focal point is an action that is more prominent due to past information. For
example, if I buy lunch from Tesco every day then, in a game where I pick where to have lunch, Tesco will be the focal
point of the game.
1/5
, Microeconomics (ECON0013) - Formulas, De�nitions and FAQs
Study online at https://quizlet.com/_cjbxvx
11. What is a perfect information extensive form game?: A perfect information game must
contain no information sets (meaning all players know the actions that were played before them). It must also ful l the
properties of a standard extensive form game:
- The game must have a unique initial node.
- The game must have a unique path from the initial node to every successive node.
- Each node must be labelled with the player making the action at that node (if the action is the result of a randomiser,
then label the node 0).
- Each ending point in the game must be labelled with the relevant payo�.
Here is an example:
12. What is an imperfect information extensive form game?: An imperfect information
game must contain an information set (meaning that players do not know about actions played before them. It must
also ful ll the properties of standard extensive form game. Here's an example:
13. What is a non-credible threat?: A non-credible threat is a threat where the person being threatened
does not believe that the threat will be carried out.
For example, in the game pictured, we know this threat isn't credible because player 2 is playing a strategy that is worse
for them:
14. What is a credible threat?: A credible threat is a threat where the person being threatened believes it
will be carried out.
For example, in the game pictured, we know this threat is credible because it is within player 2's best interest to carry
it out:
15. What is backwards induction?: A process only used in perfect information games where payo�s are
compared bottom-up.
We start with the nodes further down in the game and nd which one is best for the respective player to play. Then
we continue upwards, using the payo�s decided on by lower nodes. We repeat this process until we reach the initial
node.
This process will always produce a nash equilibrium in a perfect information game:
16. What is a nash equilibrium?: A set of strategies (pure or mixed) which result in an outcome where
no player want to change their strategy (holding the strategies of other players constant).
2/5
