Consider a policy-setting game for the regulation of globalpollution between two symmetric countries.Each country'sgovernment wants to make the sum of consumer and producer surplusas large as possible. However, the government values consumer and producer surplus differently. From the government's perspective, total surplus isCS + (1-)PS where is a number between 0 and 1. For example, = 1 would correspond to the case where the government only cares about consumer surplus and does not care about producer surplus at all, = 0 would be the opposite, and = 0.5 would value them equally.

Consumers prefer more regulations in both countries.When both counties are regulatedconsumer surplus is C.When only one country is regulatedconsumersurplusis C - (since global pollution crosses borders).When both countries are unregulatedconsumersurplusisC - 2.Producers prefer less regulations in their country.When only their country is not regulatedproducersurplusis P.When only their country is regulatedproducersurplusis P- (since regulation involves a large cost).When both countries are regulatedproducersurplusis P - 0.5 (because of global competition).As a result, the payoff matrix for each country from the government's perspectivecan be represented:

Domestic \ Foreign	Foreign Regulates	Foreign Does Not Regulate
Domestic Regulates	C + (1-)(P-) , C + (1-)(P-)	(C-) + (1-)(P-) , (C-) + (1-)P
Domestic Does Not Regulate	(C-) + (1-)P, (C-) + (1-)(P-)	(C-2) + (1-)(P-0.5), (C-2) + (1-)(P-0.5)

1) For convenience, let P = C. Suppose also that = Cfor between 0 and 1. This will simplify things nicely, for example, that consumer surplus when only one country regulates will be C(1-).Above a value of = ____________. Fill in the blank, read surrounding text. the government would prefer to regulate provided that the other country does not regulate.Round to two decimal places (e.g., 7.555 becomes 7.56).

2)Continue to let P = C and = C.If = 0.6, the Nash equilibrium will be:

• A.

One country regulates, one does not.

• B.

Both countriesregulate.

• C.

Neither country regulates.

3)Continue to let P = C and = C.If = 0.4, the Nash equilibrium will be:

• A.

One country regulates, one does not.

• B.

Both countriesregulate.

• C.

Neither country regulates.

4)Continue to let P = C and = C.If = 0.2, the Nash equilibrium will be:

• A.

One country regulates, one does not.

• B.

Both countriesregulate.

• C.

Neither country regulates.