The Game Theory and Long Run Marginal Cost in Microeconomics Term Paper

The Game Theory and Long Run Marginal Cost in Microeconomics - Term Paper Example The mathematical analysis of these situations is called game theory and was originally developed by Von Neumann and Morgenstern in 1944. As the subject develops, it has gained acceptance, particularly in business, politics and with the military. In 1994 the Nobel Prize for Economics was awarded to Harsanyi, Nash, and Selten for their contributions to Game Theory. The second part of the paper involves the study of the long run marginal cost. The long-run marginal cost curve indicates the change in total cost resulting from a change in production when all inputs including capital and plant size are variable. This paper discusses the different cases of long-run cost curve with the categories of returns to scale. Here we only consider two person’s zero-sum games. These are games with two players normally called A and B wherein any play of the game the amount of As gain equals the amount of Bs loss (so the sum of both players gains is zero). We refer to As gain and Bs loss throughout the theory but naturally, B can win games so As "gain" is not always positive. Our object is to find the best strategy for each player. By a "best strategy" we mean that if A (say) deviates from this strategy then B can adapt Bs strategy to gain more than if A stuck to the best strategy. Pure Strategies: To solve the game we first of all look for a pure strategy. This occurs when the best strategy for each player is to choose the same option for all plays of the game. If there is a pure strategy, A plays i  and B play j (say), then the ijth element (the payoff to A per play) is called a saddle point. Mixed Strategies and Dominance: If there is no pure strategy then we look for a mixed strategy which means each player mixes their options in certain proportions. Solving the game means determining these proportions in this case.