Table 11-6 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 11-6 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 11-6.Which of the following statements is true?

Question

Table 11-6  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 11-6 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 11-6.Which of the following statements is true?

Quizplus · Accepted Answer

In this case, Saudi Arabia has both a lower cost of production and more reserves than Nigeria, making it the dominant player. Therefore, Saudi Arabia's best strategy is to produce at a high level while Nigeria's best strategy is to produce at a low level to avoid undercutting the price. The Nash equilibrium occurs at Saudi Arabia producing at a high level and Nigeria producing at a low level, as neither country has an incentive to deviate from this strategy. The Nash equilibrium is a noncooperative, dominant strategy equilibrium.

Table 11-6 Suppose OPEC Has Only Two Producers,Saudi Arabia