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Now, we could determine the equilibrium point by examining all 9 of the outcomes
and checking each one to see if both parties do no better by switching.
But instead, I'm going to show an alternative method to analyze games,
which is to look for dominated strategies.
There are no dominant strategies here, but there are dominated strategies.
For example, for the politician, the strategy of contracting is domininated
by the strategy of doing nothing.
To the politician, 2 is greater than 1, 5 is greater than 4, and 9 is greater than 6.
We can say that this strategy is dominated,
and we can take it out of consideration.
Now, how does that help?
Well, now in the other direction, we do have a dominant strategy that we didn't have before.
Now for the Fed, the option of contracting gives them 8, which is better than 5 or 4,
or 3 which is better than 2 and 1.
This a dominant strategy for the Fed, and we can mark that off.
Now for the politicians, they know they're going to be in this column,
and they have a choice of getting a 2 or a 3,
The 3 would be the strategy for the politicians.
That leads us to this Nash equilibrium point,
and the values of that outcome are 3 for each party.
Is that Pareto optimal?
Actually, it's more like Pareto pessimal in that this is worst total.
Out of all these outcomes the total is only 6
as opposed to every other one is better.
To answer the question specifically is it Pareto optimal,
the answer is no, because any of these four would be better for both parties.
That may tell you something about our political system.
Next time you get an outcome that you don't like,
don't assume that the players are irrational.
Just assume that that's the way the game was set up.