Question

Discuss what is backward induction

Answer 1

Induction is the action or process of inducting someone to a post or organization or the process or action of bringing about or giving rise to something.

Backward induction is nothing but one can then determine what to do at the second-to-last time of decision.It proceeds by first considering the last time a decision might be made and choosing what to do in any situation at that time.This process continues backwards until one has determined the best action for every possible situation at every point in time.

Nash equilibrium simple helps economists to work out how competing companies set their prices, how governments should design auctions to squeeze the most from bidders and how to explain the sometimes self-defeating decisions that groups make.

For example when a new company entering into a monopolistic market, can use Nash equilibrium with back induction to whether to enter the market or not to enter or enter with deviating the competitor.

Nash equilibrium can be eliminated by backward induction by predicting the act made by them first handly.

It can be termed easily predicting others acts based on their previous acts and act accordingly to eliminate competition or any further problem which minimize profit and maximize risk in the market.