Question

Each year the United States considers renewal of Most Favored Nation (MFN) trading status with the nation of Farland. Likewise, Farland considers whether to impose tariffs, or not impose tariffs, on U.S. products. The payoff table below shows the potential economic payoffs from trade (in billions $) associated with the game in which Farland can choose to impose, or not impose, tariffs against U.S. products and the United States can choose to renew or not renew MFN status for Farland. part a: Does the United States have a dominant strategy? If so, what is it? part b: Does Farland have a dominant strategy? If so, what is it? parte: What is the Nash Equilibrium in this game? Farland Impose tariffs Do not impose tariffs Don't renew MEN Farland payoff - 100 U.S. payoff = 200 Farland payoff - 70 U.S. payoff = 180 United States Renew MEN status Farland payoff = 120 U.S. payoff - 160 Farland payoff = 110 U.S. payoff = 260 I

Answer 1

(a) No US does not have a dominant strategy. This is beacuse:

When Farland choses to impose tariffs, the best response for US is don't renew MFN (200>160)

When Farland choses to not impose tariffs, the best response for US is renew MFN (260>180)

Since there is no one best response, there is no dominant strategy for US

(b) Farland has a dominant strategy to impose tariffs. This is because imposing tariffs is best response for Farland irrespective of the strategy of US (100>70 and 120>110)

(c) Thus, from (a) and (b), it can be seen that there is a unique Nash equilibrium of the game as follows:

Farland chooses to impsoe tariffs and US chooses to not renew MFN status