This question relates to Game Theory in Economics The United States claims that
ID: 1195205 • Letter: T
Question
This question relates to Game Theory in Economics
The United States claims that Canada subsidizes the production of softwood lumber and that imports of lumber damage the interests of US producers. The United States has imposed a high tariff on Canadian imports to counter the subsidy. Canada is thinking of retaliating by refusing to export water to California. The following table shows the payoff matrix for the game that Canada and the US are playing:
Canada
Export
Don’t Export
United States
No Tariff
(100,100)
(50,25)
Tariff
(125,50)
(75,0)
What is the US’ dominant strategy?
What is Canada’s dominant strategy?
What is the outcome of the game? Explain.
Is this game like a Prisoner’s Dilemma game or different in some crucial way? Explain.
Which country would benefit more from a free trade equipment?
Canada
Export
Don’t Export
United States
No Tariff
(100,100)
(50,25)
Tariff
(125,50)
(75,0)
Explanation / Answer
(1) US Dominant strategy
Dominant strategy is the option that a player will choose irrespective of the other player's strategy.
If US imposes no tariff, its highest payoff is 100 (when Canada exports).
If US imposes tariff, its highest payoff is 125 (when Canada exports).
Since 125 > 100, US has the dominant strategy of imposition of Tariff.
(2) Canada's Dominant strategy
If Canada exports, it's highest payoff is 100 (When US imposes no tariff).
If Canada doesn't export, its highest payoff is 25 (When US imposes no tariff).
Since 100 > 25, Canada's dominant strategy is to export.
(3) Nash equilibrium
A Nash equilibrium is finding out from strategies adopted by players after they consider the other player's strategy.
When Canada exports, US's best strategy is to impose tariff because payoff is higher (125 > 100).
When Canada doesn't export, US's best strategy is to impose tariff because payoff is higher (75 > 50).
When US imposes no tariff, Canada's best strategy is to export since payoff is higher (100 > 25).
When US imposes tariff, Canada's best strateg is to export since payoff is higher (50 > 0).
So the Nash Equilibrium is (Impose Tariff, Export).
NOTE: Ouf of 5 questions the first 3 are answered.
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