Question

Indicate whether the following statement is TRUE or FALSE and explain your answer:

If one player is the leader in a game it means that s/he has the first move in the game. The key thing is that this move can be observed by the follower before making his/her own decision, otherwise it would be a simultaneous move game that cannot be solved by backwards induction.

Answer 1

TRUE-

The key thing with sequential games is that the leader should always be equally or better off as compared to a simultaneous move game. The leader moves first keeping in mind Player 2's best response to his own move and thus tries to maximize his payoff taking advantage of his position(as leader). This sequential game is solved by backward induction which is based on common knowledge of sequential rationality The moves can be observed by both players (before taking individual decisions) so that the game can be solved by BI. So player 1 knows the Best response of player 2, to each of his own strategies.