Economics 202: Intermediate Microeconomic Theory

1. Review #2 … coverage

Game Theory• “Vote by Alternating Veto”

– Player 1 prefers X to Y to X, Player 2 prefers Z to Y to X

YXX YXY YZX YZY ZXX ZXY ZZX ZZY

X 0,2 0,2 0,2 0,2 1,1 1,1 1,1 1,1

Y 0,2 0,2 2,0 2,0 0,2 0,2 2,0 2,0

Z 1,1 2,0 1,1 2,0 1,1 2,0 1,1 2,0

• Find Nash equilibria and subgame perfect Nash equilbria

Ultimatum Game• Rules

– Two players are allotted a sum of money (the “stake”)– Assume $20 stake

– The “proposer” offers a % of the total to the “responder”– can only offer in even $1 amounts

– Responder may either accept or reject• If accepted, responder gets amount offered• If rejected, both players receive $0

Summary of Ultimatum Game Results LA Machiguenga Yogyakarta Tucson Pittsburgh

Tokyo# Pairs 15 21 37 24 27 29Stake size $160 $160 $80 – 120 $10 $10 $10Average .48 .26 .44 .44 .45 .45Mode .50 .15 .50 .50 .50 .50Rejection 0 .048 .081 .083 .22 .24Rej < 20% 0/0 1/10 0/0 na 0/1 2/4

• Behavior deviates from that predicted by “game theory”• UG results are robust to stake size, degree of anonymity• Where do people get their rules, expectations, and notion of fairness from?• Why do they vary across societies? How might they affect economic behavior?

• Henrich, Joeseph (2000), “Does Culture Matter in Economic Behavior? Ultimatum Game Bargaining Among the Machiguenga of the Peruvian Amazon,” American Economic Review, vol. 90, no. 4, September, pp. 973 – 979.

The Prisoner’s Dilemma

• “Tragedy of the Common” • How many yaks to graze on the village

common? • How many Chilean sea bass to catch and

bring to market? • What values would make this a Prisoner’s

Dilemma?• Play once• Play twice• Play infinitely

Farmer A

5 bass1

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1

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2

2

Farmer B

4 bass

5 bass 4 bass

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