Game theory In economics, tariffs (taxes on imports) are sometimes used to favor domestic products in the domestic market. They can also, however, increase the price of domestic goods and lead to destructive trade wars. Consider the following example, where the payoffs are in billions of dollars (USD) annually and in the order (Country 1, Country 2) (note: both countries want to maximize their payoff).

(a) Is the above scenario a total or partial conflict? Why?

(b) Fill in the arrows in the above tables which correspond to the dominant strategies. Are there any Nash equilibria? If so, identify the strategies.

(c) (Extra credit, 1 point) Suppose that the countries engage in renegotiation every year and it is know that Country 2 will impose tariff 25% of the time. What percentage of the time should Country 1 impose tariffs on Country 2? What is the anticipated payoff? (Hint: this is not a mixed strategy problem!, consider finding the expected payoff).

 

Country 2 No tariffs Tariffs No tariffs (9, 5) (7, 7) Country 1 Tariffs (11, 3) (5, 1)