Question: Consider a game between the EU and the UK. Each country must decide whether to impose low tariffs or high tariffs on imports from the
Consider a game between the EU and the UK. Each country must decide whether to impose low tariffs or high tariffs on imports from the other country. The payoffs represent profit in millions of dollars. Each country prefers to have high tariffs, but have the other country keep tariffs low. The payoffs are represented below. Matrix with players the EU as the row player and UK as the column player. EU can play L and H. UK can play L and H. If the EU plays L and the UK plays L the payoffs are (60, 60). If the EU plays H and the UK plays L the payoffs are (90, 20). If the EU plays L and the UK plays H the payoffs are (20, 90). If the EU plays H and the UK plays H the payoffs are (40, 40). If both countries play this as an infinitely repeated game and each assumes the other is following a Grim Trigger strategy, what discount rate/shadow of the future ( ) is necessary to sustain cooperation? Show your work and explain. (15 pts.)
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