Principles of Economics: Game Theory, Nominal Income, Unemployment Rate, Real GDP, Business Cycle

Running head: PRINCIPLES OF ECONOMICS
Principles of Economics
Name of the Student
Name of the University
Course ID

PRINCIPLES OF ECONOMICS1
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................2
Question a....................................................................................................................................2
Question b....................................................................................................................................3
Question c....................................................................................................................................3
Question 3........................................................................................................................................3
Question a....................................................................................................................................3
Question b....................................................................................................................................3
Question 4........................................................................................................................................5
Question a....................................................................................................................................5
Question b....................................................................................................................................5
References........................................................................................................................................6

PRINCIPLES OF ECONOMICS2
Question 1
One important application of game theory in strategic decision making can be explained
using a business model. The table below represents a simple matrix consisting various strategies
of a business (Goodwin et al. 2015). The row indicates available strategies and associated pay
off for a particular business and the column indicates corresponding strategies and pay off for its
rival. Both players have two strategies – advertise and does not advertise. The optimum strategy
for both is to choose to advertise and enjoy a pay-off of (4, 4).
Table 1: Game theory matrix
Rival Firm
Adverti
se
Does not
advertise
ABC
Computer
Advertise 4,4 5, -5
Does not
advertise 5, 5 6, 6
Question 2
Question a
Nominal income refers to the income expressed as in absolute monetary terms. Nominal
income is actually measured in terms of current dollar. The purchasing power of people in the
economy however depends on real income which is nominal income adjusted for inflation. Rate
of inflation in contrast is of two types- anticipated inflation and unanticipated inflation.
Anticipated inflation is the predicted or expected increase in price level. Unanticipated inflation