Iran/Saudi 6 8 3 180, 360 150, 400 5 250, 300 175, 280 a. What is Saudi Arabia's best response to Iran playing 3 million barrels per day? b. What is Saudi Arabia's best response to Iran playing 5 million barrels per day? c. Does Saudi Arabia have a dominant strategy?

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
  1. There are two oil producers, Saudi Arabia and Iran (these are countries which we are treating as players in this example).  The market price will be $60/barrel if the total volume of sales is 9 million barrels daily, $50 if the total volume of sales is 11 million barrels daily, and $35 if the total volume of sales is 13 million barrels daily.  Saudi Arabia has two strategies; either produce 8 million barrels daily or 6 million.  Iran has two strategies; either produce 3 million barrels daily or 5 million.  Assume for simplicity that marginal cost of production is zero for both countries.

Here is the normal form representation of this game (where Saudi Arabia and Iran are players, they can choose strategies over what quantity to produce and they face payoffs in terms of profits).  Note that the following paragraph is simply an explanation of this representation of the game.  If you are already comfortable with the structure, feel free to skip to the questions below the horizontal line break.  In this representation, Iran's strategies (to produce either 3 or 5 million barrels per day) are in the first column, while Saudi Arabia's strategies (to produce either 6 or 8 million barrels per day) are in the first row.  The cells with two numbers in each (in italics) are the payoffs each face from a joint strategy; in the upper left, if Iran chooses 3 million barrels per day and Saudi Arabia choose 6 million barrels per day, Iran gets $180 million per day compared to Saudi Arabia's $360 million.

 

Iran/Saudi

6

8

3

180, 360

150, 400

5

250, 300

175, 280

a. What is Saudi Arabia's best response to Iran playing 3 million barrels per day?

b. What is Saudi Arabia's best response to Iran playing 5 million barrels per day?

c. Does Saudi Arabia have a dominant strategy?

d. What is Iran's best response to Saudi Arabia playing 6 million barrels per day?

e. What is Iran's best response to Saudi Arabia playing 8 million barrels per day?

f. Does Iran have a dominant strategy?

g. What is the maximum sum of profits for both countries possible in this game?  What joint strategy or strategies leads to this outcome?

h. Is there a Nash equilibrium in this game?  What is it?

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Herfindahl - Hirschman Index
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education