-Figure 2.21 summarizes a static game involving three oil companies that have purchased leases on land lying above the same crude oil deposit. Each oil company must decide whether to drill a wide or a narrow well. All payoffs are in millions of dollars. Suppose that the U.S. government wishes to encourage the development of narrow drilling technology. It does this by offering each company a $5 million production subsidy to drill narrow wells. The payoff matrix includes this subsidy. If larger payoffs are preferred, the Nash equilibrium strategy profile for this game is:
I. {Wide, Wide, Narrow}.
II. {Narrow, Wide, Wide}.
III. {Narrow, Wide, Narrow}.
IV. {Narrow, Narrow, Wide}.
V. {Wide, Narrow, Narrow}.
Which of the following is correct?
A) I, II, and III only.
B) II, III, and IV only.
C) I, III, and IV only.
D) III, IV and V only.
E) This game does not have a Nash equilibrium strategy profile.

Question

-Figure 2.21 summarizes a static game involving three oil companies that have purchased leases on land lying above the same crude oil deposit. Each oil company must decide whether to drill a wide or a narrow well. All payoffs are in millions of dollars. Suppose that the U.S. government wishes to encourage the development of narrow drilling technology. It does this by offering each company a $5 million production subsidy to drill narrow wells. The payoff matrix includes this subsidy. If larger payoffs are preferred, the Nash equilibrium strategy profile for this game is:
I. {Wide, Wide, Narrow}.
II. {Narrow, Wide, Wide}.
III. {Narrow, Wide, Narrow}.
IV. {Narrow, Narrow, Wide}.
V. {Wide, Narrow, Narrow}.
Which of the following is correct?
A) I, II, and III only. 
B) II, III, and IV only. 
C) I, III, and IV only. 
D) III, IV and V only. 
E) This game does not have a Nash equilibrium strategy profile.

Quizplus · Accepted Answer

Given the subsidy for drilling narrow wells, each company has an incentive to choose narrow drilling to maximize their payoff, assuming the other companies' choices remain unchanged. This leads to a situation where no company can unilaterally change their strategy to improve their payoff if the others are drilling narrow wells, making {Narrow, Narrow, Wide}, {Narrow, Wide, Narrow}, and {Wide, Narrow, Narrow} potential Nash equilibria.

-Figure 221 Summarizes a Static Game Involving Three Oil Companies That