Question

West Indies	West Indies	West Indies	West Indies	West Indies
East Indies		Keep status quo	Produce porridge	Produce watermelons
East Indies	Keep status quo	55,000; 25,000	55,000; 23,000	55,000; 29,000
East Indies	Produce porridge	59,000; 25,000	59,000; 23,000	63,000; 25,000
East Indies	Produce watermelons	49,000; 30,000	47,000; 25,000	49,000; 29,000

1. The game below represents an international trade of two countries each having three strategies where all payoffs are measured in thousands of dollars. For simplicity, we have assumed that there are three alternatives facing each country: do not adopt the agreement and keep the status quo, adopt the agreement and produce porridge, or adopt the agreement and produce watermelon. West Indies East Indies Keep status quo Produce porridge Produce watermelons Keep status quo 55,000; 25,000 55,000; 23,000 55,000; 29,000 Produce porridge 59,000; 25,000 59,000; 23,000 63,000; 25,000 Produce watermelons 49,000; 30,000 47,000; 25,000 49,000; 29,000 a) Is there a dominant strategy for each country? b) Find the Nash equilibrium. 2. Find an example where the behavior of others forces an individual to cheat. Explain how moral sentiment can make individuals prosper in a competitive environment.

Answer 1

1)a) For West Indies,

The best strategy when east Indies choose to keep status quo, is to produce watermelons (29,000 payoff)

The strategy when east indies decide to produce porridge is to produce either keep status quo or produce watermelons (25000 payoff)

The best strategy when east indies decide to produce watermelons is to keep status quo

Thus, the west indies has no dominant stategy.

In case of East Indies,

It would decide to produce porridge in all three cases whether west indies decide to keep status quo, produce porridge or produce watermelons as it provides maximum payoff under all three scenario (59000,59000,63000).

Thus, east indies have dominant stategy to produce porridge.

b) There would be Nash equilibrium to produce porridge by both countries (Porridge, Porridge) if west indies decide to produce porridge when east indies does so. If it would decide to keep status quo when east indies produce porridge,Nash equilibrium would be (Produce porridge, keep status quo).