Consider a small economy with only 2 banks, DSB and TKB, in the banking industry. Both banks have to decide whether to charge high or low interest rates. If both banks charge a high interest rate, DSB will earn $200m while TKB will earn $85m. If both banks charge a low interest rate, DSB will earn $250m while TKB will earn $400m. If DSB charges a higher interest rate while TKB charges a low interest rate, DSB will earn $300m while TKB will earn $65m. If DSB charges a low interest rate while TKB charges a high interest rate, DSB will eam $75m while TKB will earn $500m. Construct the payoff matrix for the earning of both banks, apply game theory concepts and solve for the Nash equilibrium and explain whether this is a prisoner's dilemma game.

Consider a small economy with only 2 banks, DSB and TKB, in the banking industry. Both banks have to decide whether to charge high or low interest rates. If both banks charge a high interest rate, DSB will earn $200m while TKB will earn $85m. If both banks charge a low interest rate, DSB will earn $250m while TKB will earn $400m. If DSB charges a higher interest rate while TKB charges a low interest rate, DSB will earn $300m while TKB will earn $65m. If DSB charges a low interest rate while TKB charges a high interest rate, DSB will eam $75m while TKB will earn $500m. Construct the payoff matrix for the earning of both banks, apply game theory concepts and solve for the Nash equilibrium and explain whether this is a prisoner's dilemma game.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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