Topic 16: Game Theory and Chicken

This week we experimented with game theory using “The Prisoner’s Dilemma.” We found out that the Nash Equilibrium occurs when each player acts in his/her own best interest no matter what the other does. Even though there are communication between the two groups, each group still didn’t trust each other to not to confess, because they believed that other would betray them and made them get more years in jail. Most of the time, people make rational decisions, thinking about the benefits and the cost of different decision. However, sometimes people had a sudden whim to do something without thinking much. Therefore they might end up having in a worse situation. In our experiment, both group got the same amount of years for jail but the years weren’t the least. If in all rounds, each group were to stay quiet, we wouldn’t have that many years in jail. Therefore in this case, bad outcome is always inevitable. People try to avoid bad outcome, but sometimes it just happens due to the dishonesty of other group or wrong decision. For example, in communication, you might tell the other group that two of you would stay quiet to get the better outcome. However, during the decision making, each group might not trust what other had said earlier. This caused them to confess. If the other group doesn’t confess, that group will get more years in jail. Trust is what makes a better outcome.

Topic 15: What is Monopoly

What is monopoly? A monopoly is single firm of a good for which there isn’t any substitutes. There should also be high barriers to entry, which other firms cannot enter the market easily and provide the good. Monopolies are often created because of legal barriers such as patent laws. The monopoly has control both over the quantity produced and price charged; it also faces he entire demand curve for the good produced. Therefore, it will face a downward-sloping demand curve. It follows the general rule for profit maximization, MR=MC. As the monopolist does not know exactly how much consumers are willing to buy at particular prices, it must look for the optimum price. In the video, one comentor mentions some of the problems with monopolies, but he says that those aren’t what economists are concerned with. The problem refers to the inefficiency and the efficiency of the monopolies, because sometimes the deadweight lost arises. Monopolies are often looked at as bad, but they can also considered good because the average cost decreases in monopolies, which can produce a large enough of product. If given that in the long run monopolists spend all of their surplus in maintaining their monopoly position, I wouldn’t think it’s worthwhile to attain a monopoly because their won’t be an economic profit.