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Mathematics
Exploration
Business
and
Economics
were
the
two
subjects,
which
played
an
important
role
in
decision
to
enter
the
English
school
system.
My
school,
Kent
College,
offered
both
of
these
subjects
at
the
same
time
as
the
opportunity
to
do
the
International
Baccalaureate.
Therefore
I
was
looking
for
topic
for
my
exploration,
which
combines
both
my
interest
Economics
and
Mathematics.
In
Economics
we
have
currently
just
covered
a
section
called
Microeconomics
including
the
topic
for
Higher
Levels
Theory
of
the
firm.
In
Theory
of
the
firm
we
dealt
with
different
market
structures
and
the
decision
making
of
the
firms
in
these
market
structures
to
arrive
at
a
market
price
and
output.
In
the
circumstances
of
one
of
these
market
structures
named
Oligopoly
an
assumption
has
been
made
that
states
that
the
firms
operating
in
this
market
structure
are
interdependent.
Meaning
that
the
firms
are
dependent
on
the
price
and
output
decision
of
the
their
fellow
firms.
This
is
result
of
the
low
amount
of
firms
the
operating
in
this
market
structure
(usually
around
3-4),
leading
to
a
high
market
share/power
of
each
firm.
For
instance,
if
one
firms
increases
its
price,
interdependent
means
that
the
other
firms
in
this
industry
are
directly
affected
by
this
decision,
hence
they
show
a
reaction
towards
this
decision.
To
illustrate
and
solve
such
a
situation
to
the
best,
mathematics
has
been
applied
resulting
in
the
formation
of
a
concept
called
Game
theory.
Game
theory
is
a
branch
of
mathematics
and
social
science
that
tries
to
capture
behaviour
in
strategic
situations
Maley
and
Welker
2012.
In
my
following
exploration
I
will
not
simply
explore
the
Game
theory,
but
applying
the
Game
theory
to
situation
often
found
in
Business
bargaining.
I
will
try
to
find
the
best
outcome
of
different
bargaining
situations
by
creating
linear
equations
based
on
conditions
(nash-axioms)
created
by
the
noble
winner
John
Forbes
Nash.
This
will
be
explained
and
illustrated
by
using
examples
and
diagrams.
The
bargain
issue
could
be
formally
described
as
M
payout-combinations
which
can
be
achieved
together
by
n
amount
of
player.
The
different
combinations
can
lead
to
many
different
outcomes
for
each
player.
In
the
Game
Theory
this
becomes
illustrated
in
a
Pay-off
Matrix.
As
it
is
said
that
during
the
cold
war,
game
theory
was
employed
by
the
US
and
the
USSR
to
try
to
understand
which
strategies
the
opponent
would
use
in
making
decisions
regarding
their
nuclear
arsenals,
I
am
going
to
show
such
a
pay-off
matrix
demonstrating
the
nuclear
arsenals
issue.
US
Nuclear
A
ttack
No
Nuclear
Attack
US
destroyed
US
destroyed
Nuclear
Attack
USSR
destroyed
USSR
destroyed
US
and
USSR
survive
No
Nuclear
Attack
As
shown
in
the
pay-out
matrix
there
4
payout
combinations
(m=4)
with
two
players
(n=2).
Now
in
my
following
special
example
I
am
going
to
add
a
specific
outcome
combination
called
conflict-combination,
comes
into
force
if
the
players
are
not
able
to
find
an
agreement
for
a
payout-combination.
Furthermore
in
a
the
bargain
issue
it
is
assumed
that
there
is
at
least
one
payout-combination
with
which
the
players
can
achieve
a
higher
outcome
than
with
conflict-combination.
To
illustrate
this
better,
a
real
life
situation
is
created:
Two
firms
can
work
together
to
gain
a
profit
of
maximal
1.
Now
the
firms
are
going
to
bargain
about
the
part
of
the
profit
each
receives.
But
it
needs
to
be
mentioned
that
when
we
take
x1
as
the
profit
which
firm
A
receives
and
x2
as
the
profit
which
firm
B
receives,
the
rule
x1+x2<=1
needs
to
be
obtained.
Therefore
all
other
shares
of
the
profit
where
x1+x2
<
1
is
pareto
inefficient,
because
all
players
could
increase
their
share
the
profit
until
the
sum
gives
one
without
harming
each
other.
To
solve
such
problems
the
Nash-Axiome
are
applied.
These
are
the
set
of
conditions,
which
the
outcome
needs
to
meet.
The
Nash-Axiome:
1.
There
is
only
one
optimal
outcome.
2.
The
outcome
needs
to
be
pareto
efficient.
every
firm
is
aiming
for
the
highest
outcome
for
itself
until
1.
3.
The
outcome
should
not
be
changed,
if
possibilities
become
skipped
which
no
one
would
have
chosen
anyway.
This
could
be
for
instance
if
although
the
firms
agree
at
a
outcome
of
0.4
and
0.6,
a
new
government
law
says
that
one
firm
is
not
allowed
to
more
than
0.55,
so
0.6
would
be
wrong.
This
axiome
says
that
it
does
not
have
an
effect
on
the
original
behaviour
of
the
firms.
Applying
these
rules,
helps
us
to
solve
the
bargain
issue.
First
we
create
a
graph
which
illustrates
the
distribution
of
the
profit
each
firm
gets.
As
we
can
see
it
is
possible
that
every
point,
which
lies
in
area
between
the
x1
axis,
x2
axis
and
the
linear
graph,
gives
us
a
distribution
of
profit
which
is
possible
as
a
outcome.
However
the
existence
of
Nash-Axiome
results
in
a
strong
limitation
of
possible
outcomes.
The
Axiom
states
that
the
outcome
needs
to
be
pareto-efficient,
thus
only
distributions
of
profit
are
possible
which
lie
on
the
linear
graph.
As
it
is
assumed
that
the
players
act
rational
in
an
economic
way
(maximise
their
profits),
the
product
out
of
x1
and
x2
should
be
maximised
axiome
1.
Graphical,
this
can
be
seen
as
a
rectangle,
that
has
a
corner
on
the
x2
axis
and
another
one
on
the
linear
graph.
The
area
of
such
a
rectangle,
dependent
on
x1,
can
be
illustrated
in
the
following
way.
f(x1)
=
(1-x1)
*
x1
=
-x12
+
x1
The
graph
of
this
function
is
an
inverse
parabola.
To
find
the
highest
point
(max)
of
this
graph
we
need
to
find
the
vertex.
This
can
be
done
by
transform
the
function
of
the
graph
using
binomial
formula:
-x12
+
x1
=
-(x12-x1)
=
-(x12-2*0.5x1+0.52
0.52)
=
-(x12-2*0.5x1+0.52)
+
0.25
=
-(x1-0.5)2
+0.25
Therefore
the
highest
area
is
achieved
when
x1
=
0.5
and
the
area
of
the
rectangle
0.25
is.
Moreover,
as
x2
=
1
x1
and
x1
=
0.5
is,
x2
is
0.5
as
well.
This
this
the
Nash
Bargaining
result
of
the
problem.
However,
in
economics
there
is
often
a
term
used
opportunity
cost,
which
plays
an
important
role
in
the
decision
making
of
firms.
So
lets
assume
firm
A
has
another
(opportuntity-)offer
with
which
it
can
gain
profit
of
0.2
and
firm
B
a
offer
with
which
it
can
gain
a
profit
of
0.3.
The
question
arises
if
this
has
any
effect
on
the
bargaining
outcome/distribution
of
profit.
Obviously
now,
firm
A
would
not
accept
any
agreement
with
firm
B,
where
it
gets
less
profit
than
0.2
and
firm
B
would
no
accept
any
agreement
with
firm
A,
where
it
gets
less
profit
than
0.3.
X1
>=
0.2
and
X2
>=
0.3
In
this
case
the
result/outcome
can
only
in
the
coloured
area.
But
same
to
the
first
instance
applying
the
second
axiom
restricts
the
possible
outcomes
to
points
which
lie
on
the
linear
graph,
therefore
the
middle
of
the
red
line
covered
by
the
vertical
and
horizontal
green
lines.
In
addition,
the
outcome
must
have
the
characteristic
that
the
product
out
of
(x1-0.2)*(x2-0.3)
is
maximised.
The
maximised
area
is
gained
again
by
setting
x2
=
1-x1.
(x1
-
0,2)
*
(x2
-
0,3)
=
(x1
-
0,2)
*
(1
-
x1
-
0,3)
=
(x1
-
0,2)
*
(-
x1
+
0,7)
=
-x12
+
0,7x1
+
0,2x1
-0,14
=
-x12
+
0,9x1
-
0,14
=
-(x12
-
0,9x1)
-
0,14
=
-(x12
-
2*0,45x1
+
0,45
2)
+
0,45
2
-
0,14
=
-
(x1-0,45)2
+
0,0625
Thus,
x1
is
0.45
and
x2
is
then
0.55.
Therefore
at
the
end
Firm
B
ends
up
with
a
higher
amount
of
profit
received
making
the
agreement
as
it
had
a
better
bargaining
position
at
the
start.
Bibliography:
Maley
and
Welker
Hargreaves,
Shaun:
Game
Theory
-
A
Critical
Introduction,
Routledge,
2005