Game Theory is a set of strategic models where hypothetical situations are simulated. The people who are part of the game will have to act in these situations and arrive at situations by making choices. The choice that one of the players makes is dependant on the choice the other players make. This makes Game Theory interesting and easily arrive at solutions in given conditions and situations.
It is one the techniques that managers of firms under imperfect markets like duopoly, oligopoly, monopolistic competition, etc use to arrive at the optimum price of a product along with the supply and demand interactions.
Game Theory was developed in the 40s in connection with war strategies. Now it is being used by managers to arrive at an optimal price and output for products. As Managers today deal with a higher number of ever changing scenarios, they need to plan ahead for unexpected situations.
There are a number of games in Game Theory. Some of the most popular are Prisoner’s Dilemma. We shall discuss about game called Cutting a Cake.
Cutting a Cake:
In this game, two persons A and B are given a cake and they will have to share the cake and they shall receive a fair share in the cake.
Here the problem is that if A is asked to cut the cake, there is a chance that he reserves the bigger piece for himself and give B the smaller piece.
Same is the case with B. If B is asked to cut the cake, he will do exactly as A. So, the best solution to this problem is given as the person who is not cutting the cake will reserve the right to choose first.
Here, the person will choose the bigger piece available and leave the smaller piece to the one who had cut the cake.
So, the person cutting the cake will cut the cake in such a way that either of them will get the maximum possible portion of the cake.
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