For the purposes of this problem, we will discuss pure strategies only. 1. Find all the Nash Equilibria of the one-shot game represented by the table. Does your answer depend on whether this is a sequential or a simultaneous-move game? Suppose now that banks play this rate-setting game infinitely many times. Each bank has a discount rate of , meaning that $1 next period is worth $ current period. 2. What is Templetons expected lifetime payoff if the two banks found a way to maintain the outcome (Low Rate, Low Rate) forever?

3. For what values of is this outcome maintainable if Wilbur plays the grim trigger strategy? In order to maintain cooperative outcomes, Wilbur is considering using the lex talionis (a.k.a. eye-for-an-eye) strategy instead. Under this strategy, Wilbur starts with the move Low Rate and afterward plays whatever Templeton played in the previous period. For example, the 100th time the one-shot game is played, Wilbur will pick the move Templeton chose on move 99. Templeton knows this. 4. For what values of is the repeated outcome (Low Rate, Low Rate) sustainable indefinitely if Wilbur is playing lex talionis?

5. Based on parts (3) and (4), with which of the two strategies, grim-trigger or lex-talionis, is it easier to maintain collusion? Briefly explain the intuition.

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