Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 17 - Part V - Oligopoly - Problems and Applications - Page 368: 4

Answer

a) The dominant strategy for the United States is high tariffs, and the dominant strategy for Mexico is high tariffs. b) The Nash equilibrium is when economic parties interacting with each other choose their own best strategy given the strategies that all other economic parties chose. The Nash equilibrium for U.S.-Mexico trade is high tariffs for both countries. c) Yes, the perceived payoffs justify the approach to trade policy. d) Yes, the payoffs reflect the nation's welfare.

Work Step by Step

a) If Mexico were to charge low tariffs, the U.S. would be better off charging high tariffs (gaining 30 billion dollars) than charging low tariffs (gaining 25 billion dollars). If Mexico were to charge high tariffs, the U.S. would be better off charging high tariffs (gaining 20 billion dollars) than charging low tariffs (gaining 10 billion dollars). If the U.S. were to charge low tariffs, then Mexico would be better off charging high tariffs (gaining 30 billion dollars) than charging low tariffs (gaining 25 billion dollars). If the U.S. were to charge low tariffs, then Mexico would be better off charging high tariffs (gaining 20 billion dollars) than charging low tariffs (gaining 10 billion dollars). c) When both Mexico and the U.S. charge high tariffs, both countries receive 20 billion dollars. However, when both countries charge low tariffs, both countries receive 25 billion dollars. d) When an item receives a tariff, the price increases, and demand for that item decreases. The higher a tariff, the more demand will decrease. Thus, with low tariffs, that country is better off (than compared to high tariffs).
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