Question

Consider the market for oil. Suppose for simplicity that there are only two oil producing countries—Saudi Arabia and Kuwait. Both countries must choose whether to produce a low output or a high output These output strategies with corresponding profits are depicted in the payoff matrix to the right. Kuwait's profits are in red and Saudi Arabia's are in blue, Suppose the two countries for a cartel. What is the cooperative equilibrium? Kuwait Low Output High Output $125 $70 Low Output 58 $13 Saudi Arabia 5103 580 OA. The cooperative equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a low output OB. The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a high output @C. The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a low output OD. A cooperative equilibrum does not exist for this game OE The cooperative equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a high output High Output 55 $8

Answer 1

Answer 1:

Option C. Both the countries are able to ear a higher level of output by producing less level of output. Thus, producing low Output is the cooperative outcome for both the countries.

Answer 2:

Option A. Given the pay off matrix above, the Bash equilibrium of the game occurs at the point where both the countries are producing higher level of output. This is because when one produces higher level of output the best for another country is to produce higher output level.