Poli 160AA Review Midterm 1 10.23.

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Test Need blue book 6 questions 3 types Definition questions (arrows theorem, Id all conditions for arrows theorem, condorcets paradox, voting etc) Interpretation of a game Prisoners dilemma, round-robin, voting, etc. Analysis of context/problem

Arrows theorem Everyones a rational thinker Rational actors will maximize their utility, measure of happiness, wants. Want to maximize what we want.

Conditions of Arrows theorem Condition U. universal domain. All group members have a complete set of preferences also transitive preference Condition I:. independence from irrelative alternatives: Condition P. pareto optimality ( if one person gains no one else loses) Condition D. non dictatorship

Condorcets paradox= cycles. Each individual may be rational and meet the conditions for rationality, but in the group outcome a cycle may arise. Majority rule as a method of aggregating paradox. Theres no way out Voting

 Sincere Strategic Sophisticated voting takes place in two rounds. You vote strategically first in the first round, then in the second round you vote for your first choice.

Prisoners Dilemma, Coke vs Pepsi. Coke High Coke Low Pepsi High 10,10 12,7 Pepsi Low 7,12 9,9

What is a rational strategy if game is 5 rounds long? The players would want to cooperate first Another strategy is tit-for-tat Backwards induction: in sequential games you look ahead to the very end and see what logic applies.

How to deal with Collective Action problems Incentives Creating norms Coercion Market Economy Markets= a place where goods and services are exchanged

 Market = decentralized system for exchange goods and services with people whi have these goods and services Alternatives to the market Survival of the fittest= who ever gets the good gets it. Queing= whoever wants to wait in line the most gets it Lottery= randomly Central planner

Two features of the market that are ideal Information= accurately gage what you want you need to know what you are getting. Incentives =people are self-interested in a way that helps everyone out.

4 preconditions to the existence of the market Everyone has diverse preferences Diverse endowments Economies of scale. the more that a producer makes, the less it costs to make this good, so the price of the good Specialization

Benefits of the markets Gains from productive efficiency Gains from trade Reduction in transaction costs

Key terms Prices: values we set on goods and services based on how much we want to buy of a certain good and how much blah blah Law of demand

Controlling demand Price floor and price ceilings