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Game Theory: Definition, Example and Impact on Economics , Jan 2019

By : Abram Scharf Posted January 28, 2019 Reading Time: 2 minutes
No. of views: 448

What is Game Theory?

Game Theory

Game Theory is defined as a framework which is used to see a hypothetical situation when you have to deal with several players. You can say, game theory is like the science of strategy which helps to determine the mind functionality of the player. Game theory is classified into two categories that are zero-sum and non-zero-sum. In the former one, the loss of one player leads to gain for another one. Whereas, in latter game theory, there is no loss, no gain. Game theory is essential to learn as it deals with several aspects which are unknown. You can Hire Game Theory assignment help for detailed information so that you will get a better knowledge of this topic.

Example of Game Theory

Example of Game Theory

The most common example of game theory is Prisoner’s Dilemma. In this case, two criminals are arrested for committing a crime. Now prosecutor doesn’t have specific evidence which is required in a court to acquit them. So, the next step is to take criminals in solitary cells individually and ask the same set of questions. Separate chambers are essential so that they cannot communicate with each other. In the end, four deals are presented by the Officials,

  • If both the criminals confess the crime, they will sentence 5-year imprisonment.
  • If one criminal confessed but the second one denied, then the first criminal will get the imprisonment of 3 years whereas the second one will get 9-year imprisonment.
  • If the second prisoner confessed but first one denied, then the second one will get imprisonment of two years whereas the first one has to face the bar for 10 years.
  • If both of them denied the charge levelled against them, then they have to face the bar for two years.

The best strategy among these four is to go with the last one, that is don’t confess your crime. However, this can’t be possible until they are aware of these strategies. Whereas, if anyone of them confessed they have to anyhow face the imprisonment of five years.

Impact of Game Theory on Business and Economics

Game Theory brought a revolution in the field of Economics assignment and Business by computing or resolving difficulties that occurred in mathematical economic models. Like, neoclassical economics find difficulties in understanding the concepts of entrepreneurial anticipation which is unable to handle competition.

More over in business also, game theory taking its pace where it helps to understand the behaviour of economic agents. Businesses often get no idea which strategic choice must be used which can affect economic gain. For instance, a business may have to suffer from dilemmas like whether to continue these goods or not? Lower prices should be marked according to competition etc. Economist finds this theory favourable to understand firm behaviour. Once you are aware of outcomes, you can easily avoid any collusion or certain behaviour which is unfavorable to business.