llto persuaie lt tb collude? 2??. We can think of US, and Japanese trade policie
ID: 1151256 • Letter: L
Question
llto persuaie lt tb collude? 2??. We can think of US, 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 (the payoff for the U.S. is listed first): apan open Close Open 5,5 ose L 100,5 a. Assume that each country knows the payoff matix and belleves that the other country will act in its own interest. Does either country have a dominant strategy? What will be the equillbrium policies if each country acts rationally to maximize its welfare? Now assume that Japan is not certain that the United States will behave rationally.In particular, Japan is concerned that U.S. politicians may want to penalize Japán even if it does not maximlze U.S. welfare. How might this concern affect.Japan's choice of strategyt How might thls change the equilibium? b.Explanation / Answer
a)
A game is the strategic interaction between two or more players in the process of economic decision making. Each agent who makes the decision in a game is called the player. Each player has a set of choices to decide upon, these choices are called the strategies. The strategies are tied to certain outcomes called payoffs.+
The move that the player choses no matter what the other player do is called the dominant strategy. The Nash equilibrium of the game occurs when both the player takes their best strategies in response to the strategies of the other players. The prisoner’s dilemma is a situation where the players chose a Nash equilibrium that is not associated with the highest payoff of the players.
In this game is USA choose to open the best strategy of Japan is to stay open because it gave them higest payoff of 10 aginst the payoff 5 if they choose to close when USA remains open. Similarly if USA choose to close the best strategy of Japan to remain open as well. Thus "open" is the dominant strategy of JAPAN, because no matter what USA does it always choose open.
In case of USA, in the same logic, the strategy "open" is dominant for them as well. Then both countries have dominant strategy "open" and the equilibrium of the game is dominant strategy equilibrium where both play the strategy "open".
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b)
A threat is declaration of choosing a strategy that will harm other players and sometimes the player declaring the threat. The non-credible threat can harm a rational player if the opponent choses a strategy that not implied by the threat. A credible threat is one where the opponent choses the strategy implied by the threat.
In this case if the USA poses a credible threat of closing the trade for Japan, the best Japan can do is to stay open. Then if the threat is non-credible one, Japan will get higher payoff. In any way as Open is the dominant strategy no threat in this case can harm Japan in any way and this will only alter the equilibrium if USA carry out the threat and choose to "close" . Then the equilibrium is {close, open}=(-100,5)
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