Suppose that a large country imposes optimal tariffs on imports from another large country. The second country then responds with optimal tariffs on imports from the first country. For these two countries, the Nash equilibrium results in _____ for the first country and _____ for the second country.

Question

Quizplus · Accepted Answer

When both large countries impose optimal tariffs on each other, the outcome is a Nash equilibrium where both countries end up with losses. This is because the mutual imposition of tariffs reduces trade volumes, increases prices for consumers, and leads to inefficiencies in production and consumption, harming both economies.

Suppose That a Large Country Imposes Optimal Tariffs on Imports