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( * ) 0v G G v G cn? ? ?Cont’d In contrast, the social optimum should resolve FOC: (4) Comparing (3) and (4), we can see that Implications for social and economic systems (Coase Theorem) **Gm a x ( )G v G G c?( * * ) * * 39。( ) 0 , 39。 , . . . , }nnG S S u u?n**1( , ..., )nssA Formal Definition of NE ? In the nplayer normal form the strategies are a NE, if for each player i, is (at least tied for) player i’s best response to the strategies specified for the n1 other players, 11{ , ..., 。 , ..., }nnG S S u u?**1( , ..., )nss*is* * * * * * * * *1 1 1 1 1 1( , . . . , , , , . . . , ) ( , . . . , , , , . . . , )i i i n i i i i ns s s s s u s s s s s? ? ? ??Cont’d Proposition B In the player normal form game if the strategies are a NE, then they survive iterated elimination of strictly dominated strategies. 11{ , . . . , 。39。( * * ) 0v G G v G c? ? ?* * *GG?2. Dynamic Games of Complete Information ? Dynamic Games of Complete and Perfect Information ? Theory: Backward Induction Example: The Trust Game General features: (1) Player 1 chooses an action from the feasible set . (2) Player 2 observes and then chooses an action from the feasible set . (3) Payoffs are and . 1a 1A1a 2a2A1 1 2( , )u a a 2 1 2( , )u a aCont’d Backward Induction: Then “People think backwards” 2 2 1 2a r g m a x ( , )a u a a?1 1 1 2 1a r g m a x ( , ( ) )a u a R a? An example: Stackelberg Model of Duopoly Two firms quantity pete sequentially. Timing: (1) Firm 1 chooses a quantity 。( ) 0i i i i iv g g g v g g c??? ? ? ? ?* * * * *1 1 1... ...i i i ng g g g g? ? ?? ? ? ? ? ?n n*1( * ) 39。 , .