Tasks

The following tasks are designed to encourage some thinking about how the work covered in this article might have some relevance to your studies. Game theory may not be on many syllabuses for economics courses but that does not mean you cannot use the understanding encouraged in this article in your responses.

Discuss the following scenarios in your class:

• Which of the following would you prefer: a guaranteed £1 million or a chance at winning £20 million with a 40% chance of success? What factors might influence your decision?
• You learn that a relative has left you £500 in a will. On your way home from the reading of the will, a friend makes you the following proposition: he will give you an extra £100 or a 50% chance of winning a further £500. Which do you choose?
• Your teacher holds up two wallets/purses and asks you to bid for them. How much do you bid? What does the level of your bidding depend upon? What difference would it make if you knew the contents of at least one of the wallets/purses?
• Two firms are rivals in a market. They each have the choice of spending £500,000 or £1 million on an advertising budget that affects their market share. Your rival seems to have the annoying knack of always being able to second-guess your strategy. As a result, in the first three years you have lost market share. How might you reduce the impact of your rival's ability to guess your strategy? What effect might the number of years of decision-making have on the overall situation?
• Having won a million on the TV show 'Who wants to be a millionaire', you are fortunate enough to reapply and get on the show. You are in the hot seat and are on a guaranteed £32,000. You get to question 14 for £500,000. You have only one lifeline left - a 50:50. You are still not 100% convinced between answer B or D. Should you go for it and hope to win the £500,000? Would it make a difference if you were answering question 15 for £1 million?

Discuss the relevance of the introduction to game theory in this article if you were tackling questions on the following areas of economics:

• The decision of the rail regulator in a situation where companies were bidding to secure their existing franchise on the rail network.
• A decision by the government to announce a tradable permit scheme for firms who pollute
• The kinked demand curve in oligopoly theory
• The negotiations between a trade union and an employer about new pay and conditions
• Negotiations on world trade at the World Trade Organisation
• Exploratory talks between two firms over a possible merger
• A UK-based insurance business debating whether to move its call centre operations to the Indian sub-continent
• The regulator of former nationalised industries setting prices for the next five years