Table 14-3 Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. 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 Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. 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 the Nash equilibrium, each player produces their best response to the other player's action. Given this, Saudi Arabia would produce a low output (earning $80 million) if Nigeria produces a high output and produce a high output (earning $60 million) if Nigeria produces a low output. Nigeria, on the other hand, would produce a high output (earning $30 million) if Saudi Arabia produces a low output and produce a low output (earning $20 million) if Saudi Arabia produces a high output. Therefore, the Nash equilibrium is Saudi Arabia produces a low output and earns a profit of $80 million and Nigeria produces a high output and earns a profit of $30 million.

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