Suppose that Russia and Australia (the two biggest producers of diamonds) make an agreement to both keep the production of diamonds low in order to keep the price high. After reaching this agreement, each country must decide whether to follow the agreement. Suppose that they are faced with the following decision: Russia's Decision High Production Australia's Decision Low Production ($60 b, $30 b) High Production ($40 b, $40 b) Low Production ($30 b, $60 b) where cells contain (Russia's profit, Australia's profit). a. If the game is played only one time, characterize each country's best strategy. ($50 b, $50 b) b. What is the Nash equilibrium? Is the Nash equilibrium pareto efficient? Briefly explain why or why not. c. If this were an infinitely repeated game, what outcome would you expect to emerge as the equilibrium? Briefly explain.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
Suppose that Russia and Australia (the two biggest producers of diamonds) make an
agreement to both keep the production of diamonds low in order to keep the price high.
After reaching this agreement, each country must decide whether to follow the
agreement. Suppose that they are faced with the following decision:
Russia's
Decision
High
Production
Australia's Decision
High Production
($40 b, $40 b)
Low Production
($60 b, $30 b)
Low Production ($30 b, $60 b)
where cells contain (Russia's profit, Australia's profit).
a. If the game is played only one time, characterize each country's best strategy.
($50 b, $50 b)
b. What is the Nash equilibrium? Is the Nash equilibrium pareto efficient? Briefly
explain why or why not.
c. If this were an infinitely repeated game, what outcome would you expect to
emerge as the equilibrium? Briefly explain.
Transcribed Image Text:Suppose that Russia and Australia (the two biggest producers of diamonds) make an agreement to both keep the production of diamonds low in order to keep the price high. After reaching this agreement, each country must decide whether to follow the agreement. Suppose that they are faced with the following decision: Russia's Decision High Production Australia's Decision High Production ($40 b, $40 b) Low Production ($60 b, $30 b) Low Production ($30 b, $60 b) where cells contain (Russia's profit, Australia's profit). a. If the game is played only one time, characterize each country's best strategy. ($50 b, $50 b) b. What is the Nash equilibrium? Is the Nash equilibrium pareto efficient? Briefly explain why or why not. c. If this were an infinitely repeated game, what outcome would you expect to emerge as the equilibrium? Briefly explain.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 5 steps with 1 images

Blurred answer
Knowledge Booster
Payoff Matrix
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
  • SEE MORE 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