Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has
ID: 1162982 • Letter: S
Question
Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in the table below shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota. Saudi Arabia's (SA) output Low High Low SA: $200M profi SA: $180M profit N:$15M profit High SA: $190M profit N: $35M profitN: $25M profit Nigeria's (N) output N: $12M profit SA: $175M profit a. What is Nigeria's dominant strategy? Why? (1 point) b. What is Saudi Arabia's dominant strategy? Why? (1 point)Explanation / Answer
(a)
If Saudi Arabia keeps the output low, Nigeria can earn higher profit if it keeps output high.
If Saudi Arabia keeps output high, Nigeria can earn higher profit if it keeps output high as well.
So, Nigeria will keep output high irrespective of decision being made by Saudi Arabia.
Dominant strategy implies that strategy which a player will always choose irrespective of the strategy choosen by the other player.
Nigeria is always choosing strategy of high output.
So,
Nigeria's dominant strategy is producing high output.
(b)
If Nigeria keeps the output low, Saudi Arabia can earn higher profit if it keeps output low.
If Nigeria keeps output high, Saudi Arabia can earn higher profit if it keeps output low.
So, Sausi Arabia will keep output low irrespective of decision being made by Nigeria.
Dominant strategy implies that strategy which a player will always choose irrespective of the strategy choosen by the other player.
Saudi Arabia is always choosing strategy of low output.
So,
Saudi Arabia's dominant strategy is producing low output.
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