Question

Consider the market for oil. Suppose for simplicity that there are only two oil producing countries—Saudi Arabia and Kuwait. Both countries must choose whether to produce a low output or a high output. Kuwait Low Output High Output These output strategies with corresponding profits are depicted in the payoff matrix to the right. Kuwait's profits are in red and Saudi Arabia's are in blue. $120 Suppose the two countries form a cartel. What is the cooperative equilibrium? $70 Low Output $12 $17 Saudi Arabia O A. The cooperative equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a high output. O B. A cooperative equilibrium does not exist for this game. O C. The cooperative equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a low output. D. The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a high output. O E. The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a low output. $93 $65 High Output $12 What is the Nash equilibrium for this game? O A. The Nash equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a high output. O B. The Nash equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a high output. O C. The Nash equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a low output. OD. A Nash equilibrium does not exist for this game. O E. The Nash equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a low output.

Answer 1

Option E is correct. Note that there is a dominant strategy for both countries. Saudi Arabia has a dominant strategy of producing a low output but Kuwait has a dominant strategy of producing a high output. This results in a Nash equilibrium of low output and high output, (70, 17). However if they are able to co-operate they can reach a higher profit outcome, at which both the countries are able to produce low output and earn a greater cumulated profit (120+12)

Option B is correct. as mentioned there is a dominant strategy for Saudi Arabia to produce a low output and Kuwait for producing a high output.