where P1 and P2 are the respective prices charged by firms 1 and 2. Limiting the prices of each firm to either 74,84 , or 94 and assuming that these firms select price at the same time, determine the payoff matrix (with profit being the payoff and the prices representing the 3 strategy choices). Do either of these firms have a strictly dominant strategy? If so, determine it. How many Nash Equilibria does this game have? Determine them (it). [2] Several years ago, President Carter returned from a conference where he pledged to reduce U.S. oil imports to some target level. His advisors were weighing three alternatives to achieve this goal: a tariff of a specified level, a quota of a specified level, and doing nothing. The Saudi's then made threats through "official channels" saying that, depending on the U.S. action, they may retaliate by raising the oil price. The State Department took the Saudi's at their word and sought to determine the best U.S. action if retaliation was a possible Saudi strategy. Skeptics elscwhere pointed out that off-the-record talk is cheap and sought to investigate whether it was "credible" that the Saudi's would adopt a retaliatory strategy. Assume the following information is available to both the Saudi decision-maker and the U.S. decision-maker: Assume the U.S. acts first, and the Saudi's observe and then respond to that act. Depict the game tree (extensive form) for this game. Using backwards induction, determine the most likely outcome. Based on your result, discuss if the Saudi threat of retaliation credible (believable)? where P1 and P2 are the respective prices charged by firms 1 and 2. Limiting the prices of each firm to either 74,84 , or 94 and assuming that these firms select price at the same time, determine the payoff matrix (with profit being the payoff and the prices representing the 3 strategy choices). Do either of these firms have a strictly dominant strategy? If so, determine it. How many Nash Equilibria does this game have? Determine them (it). [2] Several years ago, President Carter returned from a conference where he pledged to reduce U.S. oil imports to some target level. His advisors were weighing three alternatives to achieve this goal: a tariff of a specified level, a quota of a specified level, and doing nothing. The Saudi's then made threats through "official channels" saying that, depending on the U.S. action, they may retaliate by raising the oil price. The State Department took the Saudi's at their word and sought to determine the best U.S. action if retaliation was a possible Saudi strategy. Skeptics elscwhere pointed out that off-the-record talk is cheap and sought to investigate whether it was "credible" that the Saudi's would adopt a retaliatory strategy. Assume the following information is available to both the Saudi decision-maker and the U.S. decision-maker: Assume the U.S. acts first, and the Saudi's observe and then respond to that act. Depict the game tree (extensive form) for this game. Using backwards induction, determine the most likely outcome. Based on your result, discuss if the Saudi threat of retaliation credible (believable)
