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Table 14-494)Refer to Table 14-4.Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia andYemen for the production of oil. Saudi Arabia and Yemen must decide how much oil to produce. Since thedemand for oil is inelastic, relatively low production rates drive up prices and profits. Saudi Arabia, the worldʹslargest and lowest cost producer, is able to influence market price; it has an incentive to keep output low.Yemen, on the other hand, is a relatively high cost producer with much smaller reserves. Assume Saudi Arabianow decides to try to further influence the oil market by offering to pay Yemen $25 million to produce a lowoutput.a.Create a new payoff matrix that reflects Saudi Arabiaʹs willingness to pay Yemen $25 million to produce alow output.b.What is the dominant strategy for each country in this new game?c.What is the new Nash equilibrium?Answer: a.See payoff matrix below.b.The dominant strategy for both countries is to produce a low output.c.The Nash equilibrium has both countries producing a low output.Diff: 3Page Ref: 463-464/463-464Topic: Game TheoryLearning Outcome: Micro 16: Discuss the functions of cooperation, competition, and public policies in oligopoliesAACSB: Analytic Skills28
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.