Describe what it means to say a strategic game played with 2 players is in a...

Describe what it means to say a strategic game played with 2 players is in a Nash equilibrium. Then, describe the standard trust game, and identify the Nash equilibrium. Explain why this equilibrium is a Nash Equilibrium. Finally, explain why people actually playing this game might not play as the Nash Equilibrium predicts.

Expert Solution

A strategic game played with 2 players is in a Nash equilibrium when each player's strategy is optimal. Every player wins because all get the outcome which they desire. For example strategy A means to recieve a chocolate, strategy B is loose a chocolate. Both players will choose strategy A and take a chocolate. Even if one players strategy is revealed to the other, both players will still select Strategy A. Thus A is the Nash equilibrium and the game is in a Nash equilibrium as no player has an incentive to change his strategy given what the other players are doing.

The standard trust game is when the first player decides how much endowment to give to the second player. The first player who is the sender, is also informed that whatever they send will be tripled by the experimenter and given to the second player. The second player will know decide how much to give to the first player back. Nash equilibrium will be for the first and the second player to give as little as possible in order to have a higher payoff. As player 1 knows that the amount will be tripled so player 1 will select the best strategy which is give as little as possible as the amount will be tripled anyways. Player 2 will also pursue their best possible strategy which is give as little money back in order to pursue their best possible strategy that is maximising wealth. This is the Nash equilibrium where both the participants are pursing their best possible strategy given the strategies of the other player.

People playing this game might not play as the Nash equilibrium predicts because the 2nd player in most cases sends the money back and also the first player sends almost 50% of the endowment. This showcases that people do not just care about their own wealth, they also care about others.

Rahul Sunny answered 9 months ago

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