Table 14-3

Suppose OPEC has only two producers, Saudi Arabia and Ecuador. Saudi Arabia has far more oil reserves and is the lower-cost producer compared to Ecuador. The payoff matrix in Table 14-3 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
-Refer to Table 14-3.What is the Nash equilibrium in this game?

Question

Table 14-3
  
Suppose OPEC has only two producers, Saudi Arabia and Ecuador. Saudi Arabia has far more oil reserves and is the lower-cost producer compared to Ecuador. The payoff matrix in Table 14-3 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
-Refer to Table 14-3.What is the Nash equilibrium in this game?

Quizplus · Accepted Answer

In this game, Saudi Arabia is the dominant player because of its large oil reserves and low production cost. Therefore, Saudi Arabia will always produce a low output regardless of what Ecuador does. If Ecuador produces a low output, it earns $\$15$ million, but if it produces a high output, it only earns $\$5$ million more, i.e. $\$20$ million. Therefore, it is best for Ecuador to produce a high output. In this scenario, Saudi Arabia earns $\$80$ million while Ecuador earns $\$22$ million. This is the Nash equilibrium because neither player has an incentive to change its strategy since any deviation from this strategy will result in a lower payoff.

Table 14-3 Suppose OPEC Has Only Two Producers, Saudi Arabia and Ecuador