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4. As you may have heard, the young crown price of Saudi Arabia, Mohammad bin Salman, has undertaken certain questionable practices of late, that has
4. As you may have heard, the young crown price of Saudi Arabia, Mohammad bin Salman, has undertaken certain questionable practices of late, that has led to a deterioration of U.S.-Saudi relations. As a result, the U.S. Congress has decided to impose trade sanctions on the Saudis (even though both countries still benefit from trade, with Saudi petroleum a key driver of global oil prices, even after the shale revolution). In any case, the respective heads of state get together and try to negotiate a trade agreement. They each have three possible choices: (a) Maintain tariffs against the other nation (T); (b) Seek mediation from the WTO, which would implement an international trade agreement at a small cost (M); (c) Unilaterally remove tariffs (F). The payoff matrix is as given below. Is there a dominant strategy for either player? Find all the (pure strategy) Nash equilibria in the game. How would this change if, instead, the mediation is costless and yields a payoff of 50 to each nation (assuming mutually successful mediation) and a payoff of 0 (if the other nation chooses otherwise)? " Saudi Arabia T M F T -50,-50 -150, -25 -100, 0 United M States -25, -150 -25, -25 -25, 50 0, -100 50, -25 100, 100
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