Question

Suppose OPEC has only two producers, Saudi Arabia and Nigeria Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in the table to the right shows the profits earned per day by each country. "Low output corresponds to producing the OPEC assigned quota and "high output corresponds to producing the maximum capacity beyond the assigned quota. What is the Nash equilibrium in this game? O A. There is no Nash equilibrium. OB. In the Nash equilibrium Saudi Arabia produces a low output and earns a profit of $80 million and Nigeria produces a high output and $30 million respectively. O C. In the Nash equilibrium both Saudi Arabia produce a high output and earn a profit of $60 million and $20 million respectively, OD. In the Nash equilibrium both Saudi Arabia produce a low output and earn a profit of $100 million and $20 million respectively. Saudi Arabia Low output High output Nigeria ams Nigeria earns $20 million $12 million Low output Saudi Arabia Saudi Arabia eams $100 million earns $75 million Nigeria Nigeria earns Nigeria earns $30 million $20 million High output Saudi Arabia Saudi Arabia eams $80 milion carns $60 million

Answer 1

First take the any strategy of Nigeria to be constant , say High Output , what is the best response of Saudi Arabia to this. The best response is the strategy which gives Saudi Arabia most payoff which will be High Price Price (payoff 80 > payoff of low price which is 60). Underline this payoff , i.e underline 80

Now take other strategy of Nigeria which is Low Output and keep it constant , repeat the process. Saudi Arabia's best response to it will be Low Output (100 > 75) . Underline 100.

Do this process for Nigeria by keeping strategies of Saudi Arabia constant. Underlining 30 and 20 in both cases.

The box in which there will be two underlines will be solution to this game. This will be Nash equlibirum in which every player chooses strateggy which will be the best response to the strategy of other player

The Nash Equilibirum strategy will be High output by Nigeria and Low Output by Saudi Arabia

( High Output , Low Output )

Answer B) Saudi produces low output earns $80 Million and Nigeria produces high output $30 million