Scenario: Contiguous states often use tax policy to attract residents, firms, and economic activity. These "tax competitions" between states can be modeled with game theory. Suppose New Jersey currently has a state sales tax of 7 percent and Pennsylvania has a state sales tax of 6 percent. The game shown below models the effect of a reduction in each state's sales tax rate to 3 percent on each state's sales tax revenue. Assume the motivation of each state is to maximize tax revenue. The first number in a cell is the payoff to New Jersey; the second number is the payoff to Pennsylvania.

(Source: John Greenwald, "A No-Win War Between the States," Time, April 8, 1996, 44-45.
-Refer to the scenario above.Does New Jersey have a dominant strategy?
A) No.
B) Yes. Regardless of whether Pennsylvania decides to lower its sales tax rate, New Jersey will always gain more revenue by lowering their sales tax rate to 3 percent.
C) Yes. Regardless of whether Pennsylvania decides to lower its sales tax rate, New Jersey will always gain more revenue by maintaining their sales tax rate at 7 percent.
D) Not enough information is provided to answer the question.

Question

Scenario: Contiguous states often use tax policy to attract residents, firms, and economic activity. These "tax competitions" between states can be modeled with game theory. Suppose New Jersey currently has a state sales tax of 7 percent and Pennsylvania has a state sales tax of 6 percent. The game shown below models the effect of a reduction in each state's sales tax rate to 3 percent on each state's sales tax revenue. Assume the motivation of each state is to maximize tax revenue. The first number in a cell is the payoff to New Jersey; the second number is the payoff to Pennsylvania.
  
(Source: John Greenwald, "A No-Win War Between the States," Time, April 8, 1996, 44-45.
-Refer to the scenario above.Does New Jersey have a dominant strategy?
A) No. 
B) Yes. Regardless of whether Pennsylvania decides to lower its sales tax rate, New Jersey will always gain more revenue by lowering their sales tax rate to 3 percent. 
C) Yes. Regardless of whether Pennsylvania decides to lower its sales tax rate, New Jersey will always gain more revenue by maintaining their sales tax rate at 7 percent. 
D) Not enough information is provided to answer the question.

Quizplus · Accepted Answer

A dominant strategy is one that results in the highest payoff for a player, no matter what the other player does. In this scenario, if New Jersey gains more revenue by lowering their sales tax rate to 3 percent regardless of Pennsylvania's actions, it means lowering the sales tax rate to 3 percent is New Jersey's dominant strategy.

Scenario: Contiguous States Often Use Tax Policy to Attract Residents