A small economy has 2 banks, Delta Bank (DB) and Omega Bank (OB). Both banks have to decide whether to charge high or low interest rates. If both banks charge high interest rate, DB will earn $20m while OB will earn $8m. If both banks charge low interest rate, DB will earn $25m while OB will earn $40m. If DB charges high interest rate while OB charges low interest rate, DB will earn $30m will OB will earn $6m. If DB charges low interest rate while OB charges high interest rate, DB will earn $7m will OB will earn $50m.(a) Construct the payoff matrix in terms of earning for both banks(b) Solve for the Nash equilibrium(c) Explain whether this is a prisoner’s dilemma game.

Answer: Answer: (a). The payoff matrix of the game is given below: According to the above matrix,…

Answered: A small economy has 2 banks, Delta Bank…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A small economy has 2 banks, Delta Bank (DB) and Omega Bank (OB). Both banks have to decide whether to charge high or low interest rates. If both banks charge high interest rate, DB will earn $20m while OB will earn $8m. If both banks charge low interest rate, DB will earn $25m while OB will earn $40m. If DB charges high interest rate while OB charges low interest rate, DB will earn $30m will OB will earn $6m. If DB charges low interest rate while OB charges high interest rate, DB will earn $7m will OB will earn $50m.
(a) Construct the payoff matrix in terms of earning for both banks
(b) Solve for the Nash equilibrium
(c) Explain whether this is a prisoner’s dilemma game.

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