3) We can think of U.S. and Japanese trade policies as a prisoners\' dilemma. Th

Question

3) We can think of U.S. and Japanese trade policies as a prisoners' dilemma. The two countries are considering policies to open or close their import markets. The payoff matrix is shown below. Japan Open pen 10, 10 Close-100, 5 Close 5,5 1,1 U.S. Assume that each country knows the payoff matrix and believes that the other country will act in its own interest. Does either country have a dominant strategy? What will be the equilibrium policies if each country acts rationally to maximize its welfare? a.

Explanation / Answer

Yes both countries have a dominant strategy to open their economy for trade. This is because it is better for US to open trade rather than close because it will give US higher payoff as compared to close and whatever strategy is played by Japan ( 10> -100 and 5> 1). Similar  it is better for Japan to open trade rather than close because it will give Japan higher payoff as compared to close and whatever strategy is played by US ( 10> 5 and 5> 1).

The equilbrium policy if each country acts rationally to maximize its welfare then both countries statrategy will be open bebause it will give ech country higher payoff as compared to any other strategies. This plicy will give (10,10) payoff which will be equilibrium policy for each country.

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