Say that you are a manager at one of the firms that import flowers from Ecuador through the Miami airport. Flowers differ according to their risk of pest infestation.

Suppose that your firm imports two types of flowers, one with a high risk of pest infestation and the other with a low risk. Further suppose that each day Customs inspects flowers from only one of these risk types. If Customs officials inspect the particular type of flower being imported that day, the importer incurs a loss rather than a profit, but the inspection budget increases. In the payoff matrix, the importer’s payoff is profits (or losses), and Custom’s payoff is its budget

a. Is there a pure-strategy Nash equilibrium? If so, what is it?

b. Is there a mixed-strategy Nash equilibrium? If so, what is it?

c. At the Nash equilibrium, what is the importer’s expected profit from importing highrisk flowers? From importing low-risk flowers?

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U.S. Customs Inspect High- Risk Flowers Inspect Low- Risk Flowers $5 million $0 Import $2 million High-Risk Flowers -$4 million Importer Import $0 Low-Risk Flowers $3 million $1 million -$2 million