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?
- 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?
2. Why does sharecropping continue to exist as opposed to laborers renting land and paying for the rent with the proceeds of their harvest?
Sharecropping is a farming system in which owners of the land allow others to farm it and then the harvest is split, with some portion (let's say half) going to the laborer and some to the land owner. Renting land (the "English system") is an alternative in which laborers pay a fixed monetary rent and then keep all of the proceeds of their production. For hundreds of years commentators have pointed out that sharecropping lowers overall investment and effort and that renting both generates more revenue for owners and, on average, more revenue for laborers due to the harvest generally being much larger. However, when prices drop significantly for agricultural outputs, rents can exceed the total value of output under the English system. Given that in the English system rent returns more money to land owners and on average generates more income for laborers than sharecropping, why is sharecropping still so common? Note: The answer is not that the sharecroppers do not own land. Indeed, globally many sharecroppers are landowners who engage in sharecropping on the labor and land supply side at the same time, so they have land that they are having someone else sharecrop on while sharecropping on someone else's land at the same time.
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