Table 12.4
-Refer to Table 12.4.Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia and Yemen for the production of oil.Saudi Arabia and Yemen must decide how much oil to produce.Since the demand for oil is inelastic, relatively low production rates drive up prices and profits.Saudi Arabia, the world's largest and lowest cost producer, is able to influence market price; it has an incentive to keep output low.Yemen, on the other hand, is a relatively high cost producer with much smaller reserves.Assume Saudi Arabia now decides to try to further influence the oil market by offering to pay Yemen $25 million to produce a low output.
a.Create a new payoff matrix that reflects Saudi Arabia's willingness to pay Yemen $25 million to produce a low output.
b.What is the dominant strategy for each country in this new game?
c.What is the new Nash equilibrium?
Definitions:
Economic Efficiency
The optimization of resources to best fulfill the needs and wants of individuals and society with the least waste.
Government Regulations
Rules set by government bodies to control or guide specific activities within the economy or society.
Long-Run Economic
Refers to an extended period during which all factors of production and outputs can be adjusted.
Differentiated Product
A product that is distinguished from similar products in the market by unique characteristics, leading to customer perception that there is no perfect substitute.
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