Optimal Strategy Using Preference Models

Consider a strategic interaction between two firms, Firm A and Firm B, who must simultaneously choose to set either a 'High Price' or a 'Low Price'. The four possible outcomes (payoffs for Firm A, payoffs for Firm B) are plotted on a graph. The graph also shows several of Firm A's indifference curves, which are downward-sloping, with curves further to the northeast representing higher utility for Firm A. The four outcome points are located as follows:

• (A: High, B: High) is on Firm A's indifference curve I1.
• (A: High, B: Low) is on Firm A's indifference curve I2.
• (A: Low, B: High) is on Firm A's indifference curve I3.
• (A: Low, B: Low) is on Firm A's indifference curve I4.

The indifference curves are ordered from lowest to highest utility as follows: I2 < I1 < I4 < I3.

Based on this information, what can you conclude about Firm A's strategy?

Consider a strategic interaction between two players, Player 1 and Player 2, who each have two possible strategies (A or B for Player 1; X or Y for Player 2). The four possible payoff outcomes are plotted on a graph, with Player 1's payoff on the horizontal axis and Player 2's on the vertical. The graph also shows several of Player 1's indifference curves, where curves further from the origin represent higher utility.

True or False: If the outcome (Player 1: A, Player 2: X) lies on a higher indifference curve for Player 1 than the outcome (Player 1: B, Player 2: X), this is sufficient information to conclude that Strategy A is a dominant strategy for Player 1.

Determining a Dominant Strategy from Indifference Curves

Interpreting Player Preferences from Indifference Curves

Comparing Methods for Strategy Analysis

A strategic game involves two players, Player 1 and Player 2. The possible payoff outcomes are plotted on a graph with Player 1's payoff on the horizontal axis and Player 2's payoff on the vertical axis. Player 1's preferences are represented by a set of indifference curves on this graph, with utility increasing for curves further to the northeast. Match the shape of Player 1's indifference curves to the type of preference they represent.

The graph below describes a strategic interaction between two players, Player 1 and Player 2. Each player can choose either Strategy A or Strategy B. The four possible outcomes are plotted as points, with Player 1's payoff on the horizontal axis and Player 2's payoff on the vertical axis. The curves shown are Player 1's indifference curves, with utility increasing for curves further to the northeast (up and to the right).

• The outcome (P1: A, P2: A) lies on indifference curve I3.
• The outcome (P1: B, P2: A) lies on indifference curve I1.
• The outcome (P1: A, P2: B) lies on indifference curve I4.
• The outcome (P1: B, P2: B) lies on indifference curve I2.

The indifference curves are ordered from lowest to highest utility as follows: I1 < I2 < I3 < I4.

Based on this information, what is Player 1's dominant strategy?

Analyzing Best Responses with Indifference Curves

Figure 4.12 - Anil's Self-Interested Preferences and Allocations

A microeconomist is using a graphical model to determine a player's optimal choice in a two-player strategic interaction. The model involves plotting the game's outcomes and the player's preferences. Arrange the following analytical steps in the correct logical sequence.

Determining a Dominant Strategy from Indifference Curves