The Role of Game Theory in Economics

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a. Game Theory is a mathematical tool which those large organizations that are competing will tend to behave the same way as individual competitors in a game of poker. The "players" industries will make "moves," which are the economic decisions like whether to advertise, whether to give discounts or make particular changes to their products. All this will be based on the predicted behavior of their other competing firms (Aumann

b. 2017, p.42). The situation’s outcome is predictable using payoff matrixes.

Game Theory Matrix

The equilibrium outcome of the game is that both organizations will advertise. Even though it would be advisable for the firms not to promote, the result will be unstable because each industry would have an incentive to boost if its competitor did not (Colman 2016, p.14).

P1A’ P2A


P1B’ P2A

P1B’ P2B

c. Everyday activity has its outcomes, be it positive or negative. For the issue, a decision has to be made (Telser 2017, p.54). As a student, using the game theory, I make different choices when studying. For me to study, as one of the top students in our class, I sometimes see whether my class competitors are studying or not. If they are out playing, I also decide to join them, and when they are studying, I also join them.

Question two

a) Negative Effects

On the occurrence of unexpected inflation, the people who have fixed income encounter losses. One of these people are the retired individuals (Sharafuddin and Olsson 2015, p.19). The reason behind this is because these people do not and cannot get an increase in their pay. The amount of money they receive is not enough to live on and cater for all their expenses since a dollar in today’s world has less value (Minford and Brech 2015, p.15). The banks which issue out loans get affected as they get paid back with a dollar that has less value.

Positive Effects

Most of the people who benefit from anticipated inflation are the employees whose income is high and individuals with debts (Doepke and Selezneva 2015, p.6).

a) My neighbor, who was a homeowner, which means he was a borrower. He usually gained if he had a fixed-rate mortgage. The federal government acquired from him since it received money that has a higher purchasing power than it paid the bondholder when the bond matured (Das and Loxley 2015, p.61).

Question Three

a. If the GDP of China is seven times that of Australia, it means that the economic welfare of China is better than that of Australia. GDP is a measure of the total value for money of all the final goods and services that have been exchanged in a given order over a specified period. So, if the cost of GDP is low, it means that the economy of a given state is also weak (Jones and Klenow 2016, p.2435). So, the economy of Australia is seven times less than that of China.

b. The statement is factually correct. A GDP of 14.6 is higher than a GDP of 104.1. It means that the goods and services have increased in value (Zhang 2015, p.1069).

c. As a student, the uninterrupted economic growth in Australia has helped me to have a quiet learning environment. There have been excellent services in the education sector for the past 26 years since the economy state has been stable (Bhattacharyya and Williamson 2016, p.235).


Aumann, R.J., 2017. Game theory. The New Palgrave Dictionary of Economics, pp.1-40.

Bhattacharyya, S. and Williamson, J.G., 2016. Distributional consequences of commodity price shocks: Australia over a century. Review of Income and Wealth, 62(2), pp.223-244.

Colman, A.M., 2016. Game theory and experimental games: The study of strategic interaction. Elsevier.

Das, A. and Loxley, J., 2015. The non-linear relationship between inflation and growth in developing countries. Economic & Political Weekly, 50(37), pp.59-64.

Doepke, M., Schneider, M., and Selezneva, V., 2015. Distributional effects of monetary policy. Hutchins Center Working Papers.

Farhani, S. and Ozturk, I., 2015. Causal relationship between CO 2 emissions, real GDP, energy consumption, financial development, trade openness, and urbanization in Tunisia. Environmental Science and Pollution Research, 22(20), pp.15663-15676.

Jones, C.I., and Klenow, P.J., 2016. Beyond GDP? Welfare across countries and time. American Economic Review, 106(9), pp.2426-57.

Minford, P. and Brech, M., 2015. 15. THE WAGE EQUATION AND RATIONAL EXPECTATIONS. Macroeconomic Analysis: Essays in Macroeconomics and Econometrics, 5, p.434.

Sharafuddin, S. and Olsson, A., 2015. The Impact of Unanticipated Inflation on Long-Term Treasury Bills.

Telser, L.G., 2017. Competition, collusion, and game theory. Routledge.

Zhang, A., Moffat, K., Lacey, J., Wang, J., González, R., Uribe, K., Cui, L. and Dai, Y., 2015. Understanding the social license to operate of mining at the national scale: a comparative study of Australia, China, and Chile. Journal of Cleaner Production, 108, pp.1063-1072.

January 19, 2024
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