Consider the following trade game between countries 1 and 2

Consider the following trade game between countries 1 and 2. They have 2 strategies: to keep tariffs and reduce tariffs. (Country 1 is the row player and 2 is the column player).

a) What is the pure stategy equilibrium (equilibria) of this game?

b) Does this game have any mixed strategy nash equilibrium in which players assign positive probablilities to both strategies? Explain in one or two sentences (without using algebra).

c) Will the equilibrium change if we allow the 2 countries\' policymakers to have a conversation? (This is still a one-shot game without future interactions so don\'t \"think outside of the game\"). Explain in one or two sentences.

Solution

a ) Pure strategy is (4,5)

c) No , the equilibruium will not change if th eplicy makers are allowed to have a conversation . Nash equililibrium assumes a non cooperative game in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only their own strategy.