Mexico and the members of OPEC produce crude oil.Realizing that it would be in their best interests to form an agreement on production goals,a meeting is arranged and an informal,verbal agreement is reached.If both Mexico and OPEC stick to the agreement,OPEC will earn profits of $200 million and Mexico will earn profits of $100 million.If both Mexico and OPEC cheat,then OPEC will earn $175 million and Mexico will earn $80 million.If only OPEC cheats,then OPEC earns $185 million and Mexico $60 million.If only Mexico cheats,then Mexico earns $110 million and OPEC $150 million.You may find it helpful to fill in the following payoff matrix in order to answer the question below. $\begin{array}{c}
\text { OPEC }\
\text { Mexico }
\begin{array}{|c|c|c|}
\hline& \text { Cheat } & \text { Abide } \
\hline \text { Cheat } & & \
\hline \text { Abide } & & \
\hline
\end{array}\end{array}$
Refer to the information given above.Suppose Mexico picks its strategy first and OPEC knows what they choose.OPEC told Mexico that in the event Mexico cheats on the agreement,OPEC will cheat as well but if Mexico does not cheat,neither will OPEC.This is an example of a ________ and the outcome is that ________.

Question

Quizplus · Accepted Answer

This is a credible threat and promise because OPEC's response is conditional on Mexico's action, and the outcome is that neither will cheat as both parties have an incentive to abide by the agreement.

Mexico and the Members of OPEC Produce Crude Oil Refer to the Information Given Above