Question

3. Venezuela 3 M barrels 4 M Barrels 120, 60 144,54108.48 135,45 Saudi Arabia 8 M barrels M barrels The numbers on the left represent Saudi Arabia's profit, the numbers on the right represent Venezuela's. Each country has two choices of how much oil to produce, depending on the total amount of production their profits change. A. Determine the equilibrium of the above game. Does either country have dominant strategy? B. Is this a prisoner's dilemma? Is it the best outcome for eith C. If the two countries created a monopoly which outcome would they choose?

Answer 1

a) when Saudi Arabia produces 8m barrels , Venezuela will maximise profit by producing 4mn barrels .

when Saudi Arabia produces 9m barrels , Venezuela will maximise profit by producing 4mn barrels

so producing 4mn barrel is dominant strategy for Venezuela .

similarly ,

when Venezuela produces 3m barrels , Saudi Arabia will maximise profit by producing 8mn barrels

when Venezuela produces 4m barrels , Saudi Arabia will maximise profit by producing 8mn barrels

so producing 8mn barrel is dominant strategy for Saudi Arabia .

equilibrium is when Saudi Arabia produces 8mn , and Venezuela produces 4 mn with payoff (120,60 )

b) yes this is a prisoner dilemma as the profits of the 2 nations are not maximised,

this is not the best outcome for Saudi Arabia as it could have earned higher profit by warning 144mn profit

but this is the best outcome for Venezuela as this is its maximum profit .

c) it they act as a monopolist , Saudi Arabia produce 8mn and Venezuela will produce 3mn , because the combine profits will be 200 which is more than 180 when 8mn by Saudi Arabia and 4 mn by Venezuela are produced .