Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Two large countries, A and B, are trading partners. They have to simultaneously decide their op- timal import tariff levels (a tax on imports

Two large countries, A and B, are trading partners. They have to simultaneously decide their op- timal import tariff levels (a tax on imports from the other country). Country A's gains from trade are IIA=18+6-ta6 tB-tA tB-A where t is Country A's tariff level and to is Country B's tariff level. Country B's gains from trade are symmetric: IIB = 18+6 t 6 t - t t t. Maximizing Country A's gains from trade you can see that A's best response function to the tariff level picked by Country B is ta=3-0.5-tB (B's problem is symmetric, therefore we know that B's best response function is t = 3 - 0.5-ta). The only Nash Equilibrium of that game was (t, tB) = (2, 2), while zero tariffs maximized the sum of the gains of trade. (a) Suppose this game is repeated over ten periods. What is the equilibrium path associated to the SPNE of this sequential game? (b) Suppose this game is repeated indefinitely and that both countries have the same discount factor 80.5. Find out if grim-trigger strategies can sustain cooperation at the zero-tariff level. (c) Show that a 1-period temporary reversion to the Nash equilibrium punishment won't be enough to sustain cooperation at the zero-tariff level for any discount factor & [0, 1)

Step by Step Solution

3.34 Rating (157 Votes )

There are 3 Steps involved in it

Step: 1

a In a repeated game the subgame perfect Nash equilibrium SPNE is the set of strategies that are Nash equilibria in every subgame In this game the only Nash equilibrium is t4 t5 2 2 To find the SPNE o... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Accounting

Authors: Timothy Doupnik, Hector Perera

4th edition

77862201, 978-0077760298, 77760298, 978-0077862206

More Books

Students also viewed these Law questions

Question

Review major psychological issues of childhood.

Answered: 1 week ago

Question

What are the role of supervisors ?

Answered: 1 week ago