Table 11-15 -Refer to Table 11-15.Suppose the Payoff Matrix in the Above

question 48

Essay

Table 11-15

-Refer to Table 11-15.Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia and Ecuador for the production of oil.Saudi Arabia and Ecuador 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.Ecuador,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 Ecuador $15 million to produce a low output.
a.Create a new payoff matrix that reflects Saudi Arabia's willingness to pay Ecuador $15 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?

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Definitions:

Perfect Substitutes

Goods or services that can be used in place of one another with no loss of utility or satisfaction.

Income Effect

Refers to adjustments in consumer behavior as a result of changes in purchasing power, influencing the demand for products and services.

Substitution Effect

The change in consumption patterns due to a change in relative prices, where consumers substitute a cheaper alternative for a more expensive good.

Price

The cash value expected, required, or contributed in transaction for an item.