Question 2 (a) (1) Explain the meaning of consumer surplus, producer surplus and allocative efficiency. (3 marks) (ii) With the help of diagram(s), explain why a monopoly fails to achieve allocative efficiency when it charges a single price to all customers but allocative efficiency can be achieved if the monopoly practises perfect price discrimination. (5 marks) (b) Suppose Country A and Country B are competing with each other and their people care about their own country's GDP as well as their ranking of GDP relative to the other. Having a higher GDP than the other country brings a satisfaction to people which is equivalent to an increase of GDP by $10 billion while having a lower GDP than the other country brings a dissatisfaction to people which is equivalent to a reduction in GDP by $10 billion. These two countries are considering whether to impose tariff on imports to the other country. Currently both countries do not impose tariff and Country A has a GDP of $140 billion while Country B has a GDP of $120 billion. If both countries impose tariff, their trade sector will be heavily affected and both country's GDP will drop by 20%. If one country imposes tariff but the other country does not impose tariff, the country which imposes tariff can stimulate domestic production so that its GDP will increase by 25% while the country which does not impose tariff will be heavily suffered so that its GDP will drop by 25%. (1) Model the above situation as a two-person game in which the strategies are "No tarift" and "Impose tariff". Complete the payoff matrix below. [Note: The first figure denotes the payoff to Country A and the second figure denotes the payoff to Country B. You have to write the payoff matrix in your answer book and not in this examination paper.) (4 marks) Country B No tariff Impose tariff No tariff Country A Impose tariff --- _____) (ii) What is the dominant strategy for Country A and Country B? (3 marks) (iii) Does the Nash equilibrium represents the best outcomes of the two countries? Why is it difficult for the two countries to reach the agreement which brings a better outcome to both of them? Explain. (3 marks) (iv) Suggest a way that the two countries can arrive at and are willing to follow a better agreement. (2 marks)