154 Trade agreements encourage countries to remove tariffs U

15)4. Trade agreements encourage countries to remove tariffs. Using the following decision box or nom payoff matrix, determine the best policies for China and the.United States. China Low tariffs iah toriffs China gains China gait Lo w gains ains 50b. nited hina gains China u ins qainsSb #10b 9 Tariffs IOO b gaims What is the dominant strategy for the United States? b) What is the dominant strategy for China? c) What is the Nash equilibrium for these two countries? d) Suppose that the United States and China enter into a trade agreement that simultaneously lowers trade barriers in both countries. Is this agreement a good idea? Explain.

Solution

Answer:

a) High tariff is a dominant strategy for the USA as It gains more by choosing high tariff irrespective of China\'s strategy.

b) High tariff is a dominant strategy for China as It gains more by choosing high tariff irrespective of the USA\'s strategy.

c) High Tariff, High Tariff is a Nash Equilibrium of the game as It is dominant equilibrium.

d) Yes! As both the country can double their gain from $25 billion to $ 50 billion.