Game theory economics interview questions

Original post by Anonymous

Hey does anyone know where I can find a pdf list of word problems for game theory. I have an Oxford economics interview next week. I’m trying to teach myself game theory but I don’t know where to look. I’ve been on YouTube and a lot of Google but I’m still struggling. Any help would be very much appreciated! (Or any other tips for how to prep for econ interviews as someone who doesn’t take the a level).

I will answer your question about game theory, the other person is correct though, haven’t taken an interview myself, but knowing and studying econ and finance I have a pretty in depth knowledge of game theory. So first off, game theory was made popular by Dr Nash Jr, by using outcomes in game theory to judge a bet (simple terms). So in terms of game theory, how does it work? So let’s just say, company A, has the option to choose if they choose to hire someone with the A. best financial knowledge in the world, B. the worst financial knowledge, or C. someone who is moderate enough and will get the job done. Company B also has this option, so if company B chooses A and so does company A, they both get nothing! But if they agree to split for B, so they both get B, that would be ideal wouldn’t it? But game theory is more about human behaviour, you try to trick someone into splitting, for you to then go big and win. Dr Nash was very good at reading statistics of human behaviour. Hope this has sorta explained game theory to you, I tried to explain it in a way that most people will understand, but a tv show called “no deal or deal” explains game theory to a tea! Maybe give that a watch, hope that helps in terms of understanding game theory :smile:

Reply 3

Original post by Rhewer1

I will answer your question about game theory, the other person is correct though, haven’t taken an interview myself, but knowing and studying econ and finance I have a pretty in depth knowledge of game theory. So first off, game theory was made popular by Dr Nash Jr, by using outcomes in game theory to judge a bet (simple terms). So in terms of game theory, how does it work? So let’s just say, company A, has the option to choose if they choose to hire someone with the A. best financial knowledge in the world, B. the worst financial knowledge, or C. someone who is moderate enough and will get the job done. Company B also has this option, so if company B chooses A and so does company A, they both get nothing! But if they agree to split for B, so they both get B, that would be ideal wouldn’t it? But game theory is more about human behaviour, you try to trick someone into splitting, for you to then go big and win. Dr Nash was very good at reading statistics of human behaviour. Hope this has sorta explained game theory to you, I tried to explain it in a way that most people will understand, but a tv show called “no deal or deal” explains game theory to a tea! Maybe give that a watch, hope that helps in terms of understanding game theory :smile:

Sorry mis typed I meant C, for the outcome, not B, that’s my bad

Reply 4

Original post by Rhewer1

I will answer your question about game theory, the other person is correct though, haven’t taken an interview myself, but knowing and studying econ and finance I have a pretty in depth knowledge of game theory. So first off, game theory was made popular by Dr Nash Jr, by using outcomes in game theory to judge a bet (simple terms). So in terms of game theory, how does it work? So let’s just say, company A, has the option to choose if they choose to hire someone with the A. best financial knowledge in the world, B. the worst financial knowledge, or C. someone who is moderate enough and will get the job done. Company B also has this option, so if company B chooses A and so does company A, they both get nothing! But if they agree to split for B, so they both get B, that would be ideal wouldn’t it? But game theory is more about human behaviour, you try to trick someone into splitting, for you to then go big and win. Dr Nash was very good at reading statistics of human behaviour. Hope this has sorta explained game theory to you, I tried to explain it in a way that most people will understand, but a tv show called “no deal or deal” explains game theory to a tea! Maybe give that a watch, hope that helps in terms of understanding game theory :smile:

Considering that all producers and consumers as humans will think rationally and proportionally for their own self benefit, I’d assume both companies would end up getting nothing and picking A, hoping the other would pick C.

Reply 5

Original post by Loneb

Considering that all producers and consumers as humans will think rationally and proportionally for their own self benefit, I’d assume both companies would end up getting nothing and picking A, hoping the other would pick C.

In theory, they wouldn’t chose C they would go for what’s best for them, and try and convince you to split the prize of “C” so it’s more about human behaviour, if everyone goes for A, the best option but you go for C, in practice you have won. So in an ideal world where everyone is perfect and anyone shares the same knowledge on the information provided, your best option would be to vote Split C, so you get some of the pie and someone gets the other half.

Reply 6

Original post by Rhewer1

In theory, they wouldn’t chose C they would go for what’s best for them, and try and convince you to split the prize of “C” so it’s more about human behaviour, if everyone goes for A, the best option but you go for C, in practice you have won. So in an ideal world where everyone is perfect and anyone shares the same knowledge on the information provided, your best option would be to vote Split C, so you get some of the pie and someone gets the other half.

If I was asked this in an interview I would likely say they’d both pick A, considering they are companies who want to minimise costs whilst simultaenously maximising profits and output then they’d likely pick A no?

Reply 7

Stiffy Byng

19

Original post by Loneb

Considering that all producers and consumers as humans will think rationally and proportionally for their own self benefit, I’d assume both companies would end up getting nothing and picking A, hoping the other would pick C.

Humans do not always act rationally or in their own best interests, whether in economics, in politics, or in personal life. Behavioural economics seeks to depict reality. Mathematical models often fail to do so. Look at bubbles and crazes in markets to see how irrational people can be. Note how the best product sometimes loses to an inferior product because the market prefers the inferior product.

Reply 8

Original post by Stiffy Byng

Humans do not always act rationally or in their own best interests, whether in economics, in politics, or in personal life. Behavioural economics seeks to depict reality. Mathematical models often fail to do so. Look at bubbles and crazes in markets to see how irrational people can be. Note how the best product sometimes loses to an inferior product because the market prefers the inferior product.

Reading this was extremely eye opening. From my view I’d always assume economists act in their self interest right? I guess not. I’d like to make the argument that most humans are inherently selfish which is widely discussed in behavioural economics although many things can influence their decisions: nudging, anchoring etc

Reply 9

Original post by Stiffy Byng

Humans do not always act rationally or in their own best interests, whether in economics, in politics, or in personal life. Behavioural economics seeks to depict reality. Mathematical models often fail to do so. Look at bubbles and crazes in markets to see how irrational people can be. Note how the best product sometimes loses to an inferior product because the market prefers the inferior product.

Can you give a real life example of how humans may NOT act rationally in economics? You mentioned the best product vs inferior and crazes in market but more specific

Reply 10

Original post by Loneb

Can you give a real life example of how humans may NOT act rationally in economics? You mentioned the best product vs inferior and crazes in market but more specific

That guy explained it quite well I think, but if I had to give you an answer of “real world scenarios” with the inferior/best product. Think of this as a supply and demand curve, if you produce X for £3 and sell it for £70 and it’s the best product so we can say that X=3 and Y=70, but then a middle ground company comes and produces X for £3 also, but this time they sell it for £50, so once again X= 3 and Y=50, but it’s okay, the product isn’t the best but it can handle the job, but now another company comes in and produces it for £3 also but sells it for £20, it’s not the best it’s the worst of 3, but it’s cheaper so X=3 and Y=20. This is what is known as price setting, which we see in the local shops, such as Aldi for example, they would be selling the low and middle products, it’s not the BEST product, but it wins because it’s cheaper and most people love a bargain. We can take this supply and demand curve example into “game theory” basically we can translate this into game theory as such. It would be in the best interest of the consumer to choose the middle ground of split, so both get the split of a decent pie at a reasonable price, versus if they both went for A, this would result in no win for both of them, but they should go for A if they think they tricked the other consumer, so then the other consumer gets nothing of the pie and you take all the winnings of the best pie to ever be made!. However, there is a thing in game theory where there is not the best outcome it’s called a “Nash equilibrium” I purposely choose supply and demand to incorporate this, cause in reality if a consumer was to choose A they would be getting ripped off when others have made it for the same price as you, so this would be called a Nash equilibrium! Making it the “optimal solution” to just split. Hope this made a little more sense. I’ll happy to show what an actual graph would look like. But anyways hoped this helped :smile:

Reply 11

Original post by Rhewer1

That guy explained it quite well I think, but if I had to give you an answer of “real world scenarios” with the inferior/best product. Think of this as a supply and demand curve, if you produce X for £3 and sell it for £70 and it’s the best product so we can say that X=3 and Y=70, but then a middle ground company comes and produces X for £3 also, but this time they sell it for £50, so once again X= 3 and Y=50, but it’s okay, the product isn’t the best but it can handle the job, but now another company comes in and produces it for £3 also but sells it for £20, it’s not the best it’s the worst of 3, but it’s cheaper so X=3 and Y=20. This is what is known as price setting, which we see in the local shops, such as Aldi for example, they would be selling the low and middle products, it’s not the BEST product, but it wins because it’s cheaper and most people love a bargain. We can take this supply and demand curve example into “game theory” basically we can translate this into game theory as such. It would be in the best interest of the consumer to choose the middle ground of split, so both get the split of a decent pie at a reasonable price, versus if they both went for A, this would result in no win for both of them, but they should go for A if they think they tricked the other consumer, so then the other consumer gets nothing of the pie and you take all the winnings of the best pie to ever be made!. However, there is a thing in game theory where there is not the best outcome it’s called a “Nash equilibrium” I purposely choose supply and demand to incorporate this, cause in reality if a consumer was to choose A they would be getting ripped off when others have made it for the same price as you, so this would be called a Nash equilibrium! Making it the “optimal solution” to just split. Hope this made a little more sense. I’ll happy to show what an actual graph would look like. But anyways hoped this helped :smile:

To give you another example, game theory is used in the court system everywhere in the world funnily enough. For example,imagine two suspects, Alice and Bob, who are arrested for a crime and are being interrogated separately. Each has the option to either Confess or Not Confess. If both confess, they each receive 5 years in prison. If one confesses and the other doesn’t, the confessor gets a reduced sentence of 1 year for cooperating with the authorities, while the other receives the full sentence of 10 years for not confessing. If neither confesses, both get 2 years because the authorities lack enough evidence to charge them with a major crime, but they still receive a minor sentence. The Nash equilibrium occurs when both players confess, because neither can improve their individual outcome by changing their strategy unilaterally. If Alice expects Bob to remain silent, she is better off confessing (to avoid the full 10 years), and vice versa. However, while (Confess, Confess) is the Nash equilibrium, it’s not Pareto optimal because both Alice and Bob would be better off if neither confessed, leading to (Not Confess, Not Confess), where both would only get 2 years instead of 5. Therefore, (Not Confess, Not Confess) is Pareto optimal, as it’s the best outcome for both, with no player able to improve their situation without worsening the other’s. In this rational decisions based on self-interest (confessing) lead to a less optimal outcome for both players, while cooperation (not confessing) would yield a more socially optimal result. Hoped this explanation helped guide my other point 🤣

Reply 12

Original post by Rhewer1

To give you another example, game theory is used in the court system everywhere in the world funnily enough. For example,imagine two suspects, Alice and Bob, who are arrested for a crime and are being interrogated separately. Each has the option to either Confess or Not Confess. If both confess, they each receive 5 years in prison. If one confesses and the other doesn’t, the confessor gets a reduced sentence of 1 year for cooperating with the authorities, while the other receives the full sentence of 10 years for not confessing. If neither confesses, both get 2 years because the authorities lack enough evidence to charge them with a major crime, but they still receive a minor sentence. The Nash equilibrium occurs when both players confess, because neither can improve their individual outcome by changing their strategy unilaterally. If Alice expects Bob to remain silent, she is better off confessing (to avoid the full 10 years), and vice versa. However, while (Confess, Confess) is the Nash equilibrium, it’s not Pareto optimal because both Alice and Bob would be better off if neither confessed, leading to (Not Confess, Not Confess), where both would only get 2 years instead of 5. Therefore, (Not Confess, Not Confess) is Pareto optimal, as it’s the best outcome for both, with no player able to improve their situation without worsening the other’s. In this rational decisions based on self-interest (confessing) lead to a less optimal outcome for both players, while cooperation (not confessing) would yield a more socially optimal result. Hoped this explanation helped guide my other point 🤣

Explain Pareto Optimal?

Reply 13

Original post by Loneb

Explain Pareto Optimal?

Pareto optimal means a situation where no one can be made better off without making someone else worse off. In simple terms, it’s the best outcome where everyone’s situation is as good as it can be, and improving one person’s situation would harm another person’s. If you’re in a Pareto optimal situation, you can’t make any changes that would improve someone’s position without hurting someone else. So in that case I stated above, if both stayed silent, as both would get 2 years for example, if they stayed silent but if someone talked worsening the other then it would not be Pareto optimal. You wouldn’t need to know this for the interview as this is more of a “undergrad” type of question.

Reply 14

Original post by Rhewer1

Pareto optimal means a situation where no one can be made better off without making someone else worse off. In simple terms, it’s the best outcome where everyone’s situation is as good as it can be, and improving one person’s situation would harm another person’s. If you’re in a Pareto optimal situation, you can’t make any changes that would improve someone’s position without hurting someone else. So in that case I stated above, if both stayed silent, as both would get 2 years for example, if they stayed silent but if someone talked worsening the other then it would not be Pareto optimal. You wouldn’t need to know this for the interview as this is more of a “undergrad” type of question.

Wow you seem really educated on this side of economics, do you have an interview or are you in uni? If you have an interview I’m sure you’ll be great

Reply 15