Question

Consider the market for oil. Suppose for simplicity that there are only two oil producing countrieslong dashSaudi Arabia and Kuwait. Both countries must choose whether to produce a low output or a high output. These output strategies with corresponding profits are depicted in the payoff matrixLOADING... to the right.​ Kuwait's profits are in red and Saudi​ Arabia's are in blue. Suppose the two countries form a cartelLOADING.... What is the cooperative equilibrium

Answer 1

Answer:

Nash Equilibrium : Each player at best strategy action, given other player strategy action.

Nash Equilibrium for Saudi Arabia, Kuwait : {High Output, High Output}

Explanation:

Considering the pay off matrix for Kuwait & Saudi Arabia, for making low or high output , to be : [First payoff Saudi, Second Payoff Kuwait]

                                                        Kuwait

                                            Low Output   High Output

Saudi Arabia    Low Output  (120,10)            (80,20)

                       High Output    (105,8)             (90,15)

Nash Equilibrium is a game theory concept, determined at the -  best strategy action for each player, given other player's strategy action.

In this case :

• If Saudi Arabia plans low output, its better for Kuwait to produce high output, [(20 > 10) in first row - saudi's low output]

• If Saudi Arabia plans high output, its better for Kuwait to produce high output [ (15 > 8) in second row - saudi's high output]
• Saudi is better to chose low output, if Kuwait plans for low output [(120 > 105) in in first column - Kuwait's low output]
• Saudi is better to chose high output, if Kuwait plans for high output [(90 > 80) in second column - Kuwait's low output]

So, its best for Saudi Arabia to produce high output if Kuwait produces high output. Its also best for Kuwait to produce high output if Saudi Arabia produces high output.  

Hence {High Output, High Output} is the Nash Equilibrium.