Table 11-8
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 11-8 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 11-8.What is the Nash equilibrium in this game?

Question

Table 11-8
  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 11-8 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 11-8.What is the Nash equilibrium in this game?

Quizplus · Accepted Answer

In this game, Saudi Arabia is the dominant player as it has more reserves and is the lower-cost producer. Therefore, it will always choose to produce a lower output to maximize its profit. Ecuador, on the other hand, has to consider the actions of Saudi Arabia and try to earn the maximum profit possible. The Nash equilibrium occurs when Saudi Arabia produces a low output and earns a profit of $80 million, while Ecuador produces a high output and earns a profit of $22 million. This is because if Ecuador also chooses a low output, then its profit will only be $15 million, which is less than the profit it would earn by choosing a high output. If both countries choose a high output, Saudi Arabia will earn less profit as compared to the case where it chooses a low output. Therefore, C is the correct answer.

Table 11-8 Suppose OPEC Has Only Two Producers, Saudi Arabia