ECON1001 Study Guide - Final Guide: Nash Equilibrium, Strategic Dominance, Opportunity Cost

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14 Jun 2020

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The united states and china are deciding on whether to impose higher tariffs on imports from the other country. President trump and president xi believe the payoffs to alternative trade policies are as follows: a n i h. Define dominant strategy: play regardless of opponent"s move. Us dominant strategy is high tariffs b/c 230 > 220 and 150 > 100. Define nash equilibrium: stable equilibrium (no incentive to switch strategy). High-high in this case. (c) worrying about a trade war with china, trump tweets: But be cool, it will all work out! (14 may. In the aggregate, low-low results in 420 while high-high only results in 300. Liberalization is welfare enhancing in both import and export sectors. It increases productivity and competition across the economy. The country thinks it is better for them to keep a high tariff and the other lowers them but they are missing out on all the benefits of competition.

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Problems and Applications Q4

Consider trade relations between the United States and Mexico. Assume that the leaders of the two countries believe the payoffs to alternative trade policies are shown in the following payoff matrix:

		United States' Decision
		Low Tariffs	High Tariffs
Mexico's Decision	Low Tariffs	$25 billion, $25 billion	$10 billion, $30 billion
Mexico's Decision	High Tariffs	$30 billion, $10 billion	$20 billion, $20 billion

The dominant strategy for the United States is to always choose tariffs. The dominant strategy for Mexico is to always choose tariffs.

True or False: The Nash equilibrium outcome for trade policy is for the United States to have high tariffs and Mexico to have low tariffs.

In 1993, the U.S. Congress ratified the North American Free Trade Agreement, in which the United States and Mexico agreed to reduce trade barriers simultaneously.

True or False: Given the trade strategy decisions in the table, the United States is worse off and Mexico is better off with this new trade policy.

Based on your understanding of the gains from trade (discussed in Chapters 3 and 9), which of the following statements accurately characterize how well the payoffs indicated for the four possible outcomes actually reflect a nation's welfare? Check all that apply.

The payoffs in the upper right and lower left corners of the matrix reflect a nation's welfare because the nation with lower tariffs is better off since that nation is more open to trade.

The payoffs in the upper right and lower left corners of the matrix do not reflect a nation's welfare because tariffs hurt the overall total surplus, so both countries' welfare should decline regardless of who charges the high and low tariffs.

The payoffs in the upper left and lower right corners of the matrix reflect a nation's welfare because they show that trade is beneficial and tariffs are a barrier to trade.

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ECON1001 Study Guide - Final Guide: Nash Equilibrium, Strategic Dominance, Opportunity Cost

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