Deck 15: Fairness and Psychological Games

Question 1

A preference for a fair distribution of consequences or pay-offs is an other-regarding preference.

Answer 1

True

Question 2

Consider the following game between two players. Player 1 has two possible actions: $U$ or $D$ . Player 2 has two possible actions: $L$ or $R$ . They payoffs to each strategy profile are as follows: $\{U, L\}=\{3,4\},\{U, R\}=\{2,3\},\{D, L\}=\{4,4\}$ , and $\{D, R\}=\{3,4\}$ . Player 1 has a dominant strategy to play $D$ and Player 2 has a weakly dominant strategy to play L. Players 2 knows Player 1 will play $D$ . Player 2 decides to play $L$ instead of $R$ so that Player 1 will receive 4 instead of 3 . Player 2 can best be described as Altruistic.

Answer 2

False

Question 3

Inequity aversion means acting spiteful to the relatively rich and altruistic to the relatively poor.

Answer 3

True

Question 4

The notion of dual entitlement restricts how firms adjust prices to exogenous factors.

Question 5

An individual who has a preference for fairness prefers that all individuals receive the same pay-off instead of different pay-offs.

Question 6

A preference for fairness concerns beliefs about the other player's intention.

Question 7

Consider the "Battle of the Sexes" game presented in Figure 15.2. In Rabin's model of fairness if the wife believes that the husband thinks she is going to Boxing and the husband chooses Boxing, then if the wife chooses Boxing she is be altruistic.

Question 8

In the fairness model, action is rewarded and punished, not intention.

Question 9

A psychological equilibrium consists of both players have realistic beliefs and the strategies chosen by each player is a Nash Equilibrium, given those beliefs.

Question 10

The sentiment: "once you have a dog in the fight, your perception of fairness is skewed toward your own self-interest in a way that can impact your judgment in transactions" is an example of a self-serving bias.

Question 11

The primary contribution of the kindness function is that allows individuals to respond to intent rather than just action of other individuals.

Question 12

A reference transaction refers to the status quo profit of a firm.

Question 13

The notion of a dual entitlement restricts the behavior of both the firm and the consumer.

Question 14

The example of Dantes' behavior from The Count of Monte Cristo is meant to demonstrate that

A) Sometimes people act spitefully.
B) Preferences cannot simply be classified as either selfish or altruistic.
C) People have preferences for spite.
D) Revenge is a natural behavioral response.

Question 15

Consider the following game between two players. Player 1 has two possible actions: $U$ or $D$ . Player 2 has two possible actions: $L$ or $R$ . They payoffs to each strategy profile are as follows: $\{U, L\}=\{3,4\},\{U, R\}=\{2,3\},\{D, L\}=\{4,4\}$ , and $\{D, R\}=\{3,2\}$ . Player 1 has a dominant strategy to play $\mathrm{D}$ and Player 2 has a dominant strategy to play L. Player 2 knows Player 1 will play $D$ and decides to play R. Player 2 can best be described as

A) Altruistic.
B) Inequity Averse.
C) Spiteful.
D) Selfish.

Question 16

Consider the following game between two players. Player 1 has two possible actions: $U$ or $D$ . Player 2 has two possible actions: $L$ or $R$ . They payoffs to each strategy profile are as follows: $\{U, L\}=\{3,4\},\{U, R\}=\{2,3\},\{D, L\}=\{4,4\}$ , and $\{D, R\}=\{3,4\}$ . Player 1 has a dominant strategy to play $D$ and Player 2 has a weakly dominant strategy to play L. Players 2 knows Player 1 will play $D$ . Player 2 decides to play $R$ instead of $L$ . Player 2 can best be described as

A) Altruistic.
B) Inequity Averse.
C) Spiteful.
D) Selfish.

Question 17

Consider the following game between two players. Player 1 has two possible actions: $U$ or $D$ . Player 2 has two possible actions: $L$ or $R$ . They payoffs to each strategy profile are as follows: $\{U, L\}=\{3,4\},\{U, R\}=\{2,3\},\{D, L\}=\{4,4\}$ , and $\{D, R\}=\{5,2\}$ . Player 1 has a dominant strategy to play D. Knowing that Player 1 will play $D$ , Player 2 decides to Play $R$ instead of $L$ in order to increase Player 1's pay-off. Player 2 can best be described as

A) Altruistic.
B) Inequity Averse.
C) Spiteful.
D) Selfish.

Question 18

Tina has a high paying job and Leah has a low paying job. Tina never accesses the social services for which she pays taxes and thus does not believe it is fair for her to pay additional taxes. Leah uses the social services because she cannot provide those services for herself with her meager income. Not surprisingly, Tina thinks the community's budget problem should be solved by cutting spending on social services, not by raising taxes on the highearner and Leah thinks the exact opposite. Tin and Leah's beliefs reflect

A) Overconfidence.
B) Spitefulness.
C) Inequity Aversion.
D) Self-serving bias.

Question 19

Dual entitlement implies that a firm can increase the price of a good under all of the following conditions EXCEPT

A) Oil prices increase.
B) One of the firm's suppliers goes bankrupt and cannot sell the intermediate good to the firm.
C) Minimum wage increase.
D) The community's preference for the firm's good increases.

Question 20

Dual entitlement can have the following consequences EXCEPT

A) Higher unemployment.
B) The best teachers leave the teaching profession and go into the private sector where they can make more money.
C) Higher minimum wage.
D) Prices never adjust downwards, only upwards.

Question 21

Psychological games are different from simple games because

A) Players are not selfish.
B) Players include higher-order beliefs into their strategies.
C) Players trick the each other.
D) Players engage in mind games.

Question 22

Which of the following is considered a higher-order belief?

A) Paul believes Dan will play Up.
B) Dan believes Paul will play Up.
C) Dan believes that Paul does not understand the rules of the game.
D) Paul believes that Dan believes that Paul will play Up.

Question 23

Consider equation 15.2. If $\beta=0$ , how does the dictator's optimal choice of $x$ depend on the value of $\alpha$ ?

A) The larger is $\alpha$ the larger is $x$ .
B) The smaller is $\alpha$ the larger is $x$ .
C) If $\alpha=0$ , then $x=10$ if $\alpha>0$ , then $x=5$ .
D) Not enough information to answer this question.

Question 24

In the kindness function, higher order beliefs are captured by which parameter?

A) $a_{1}, a_{2}$
B) $b_{1}, b_{2}$
C) $c_{1}, c_{2}$
D) The curvature of the utility function.

Question 25

Consider the "Battle of the Sexes" game presented in Figure 15.2. In Rabin's model of fairness, when does the husband choose a different event than his wife?

Question 26

Consider the "Battle of the Sexes" game presented in Figure 15.2. In Rabin's model of fairness if the wife believes that the husband thinks she is going to Boxing and the husband chooses Boxing, what will the wife's equilibrium action be?

Question 27

Suppose a victim of alleged medical malpractice follows the strategy: lawsuit if no apology from doctor and no lawsuit if apology from doctor. Which types of doctors always apologize and never have a lawsuit filed against them?

Question 28

Ed is working as part of a 5 person team. All members of the team can choose whether to 1 unit of effort or 0 units of effort, $e_{i}$ . A unit of effort costs a member 1.5 units, $c_{i}$ and each team member is rewarded $\Sigma e_{i}$ . That is, if all 5 members contribute $e_{i}=1$ then they will each receive $\Sigma e_{i}-c_{i}=5-1.5=3.5$ . If Ed is selfish and he knows all of his team members are selfish, what will be Ed's pay-off.

Question 29

Consider the utility function in 15.2. If $\alpha=0, \beta>0$ then what is the utility maximizing choice of $\mathrm{x}$ ?

Question 30

Consider equation 15.2. If $\beta=0$ and $\alpha \in(0,1)$ what value of $x$ does the dictator choose?