Question
A small economy has 2 banks, Delta Bank (DB) and Omega Bank (OB). Both banks have to decide whether to charge high or low interest
A small economy has 2 banks, Delta Bank (DB) and Omega Bank (OB). Both banks have to decide whether to charge high or low interest rates. If both banks charge high interest rate, DB will earn $20m while OB will earn $8m. If both banks charge low interest rate, DB will earn $25m while OB will earn $40m. If DB charges high interest rate while OB charges low interest rate, DB will earn $30m will OB will earn $6m. If DB charges low interest rate while OB charges high interest rate, DB will earn $7m will OB will earn $50m.
(a) Construct the payoff matrix in terms of earning for both banks
(b) Solve for the Nash equilibrium
(c) Explain whether this is a prisoner's dilemma game.
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