# 4 - ECON 3600 Problem Set 4 You may work in groups of up to...

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ECON 3600, Problem Set 4 You may work in groups of up to three students. Hand in ONE assignment for the entire group. Make sure to include the name and ID number of everyone in the group. Due Thursday, February 9. 1. Exercise 68.1 in Osborne's An Introduction to Game Theory . 2. (From Watson's Strategy ) Suppose there are two countries labeled 1 and 2. Let x i be the tariff level of country i (in percent), for i = 1,2. If country i picks x i and the other country (j) selects x j , then country i gets a payoff of 2000 + 60 x i + x i x j - x i 2 - 90 x j (measured in billions of dollars). Assume that x 1 and x 2 must be between 0 and 100 and that set tariff levels simultaneously and independently. a. Find the best response functions for the countries b. Compute the Nash equilibrium c. Show that the countries would be better off if they made a binding agreement to set lower tariffs (than in equilibrium). You do not need to speculate about how such an agreement could be enforced.

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