There are two oil producers, Saudi Arabia and Iran (these are countries which we are treating as players in this example). The market price will be $60/barrel if the total volume of sales is 9 million barrels daily, $50 if the total volume of sales is 11 million barrels daily, and $35 if the total volume of sales is 13 million barrels daily. Saudi Arabia has two strategies; either produce 8 million barrels daily or 6 million. Iran has two strategies; either produce 3 million barrels daily or 5 million. Assume for simplicity that marginal cost of production is zero for both countries.

Here is the normal form representation of this game (where Saudi Arabia and Iran are players, they can choose strategies over what quantity to produce and they face payoffs in terms of profits). Note that the following paragraph is simply an explanation of this representation of the game. If you are already comfortable with the structure, feel free to skip to the questions below the horizontal line break. In this representation, Iran's strategies (to produce either 3 or 5 million barrels per day) are in the first column, while Saudi Arabia's strategies (to produce either 6 or 8 million barrels per day) are in the first row. The cells with two numbers in each (in italics) are the payoffs each face from a joint strategy; in the upper left, if Iran chooses 3 million barrels per day and Saudi Arabia choose 6 million barrels per day, Iran gets $180 million per day compared to Saudi Arabia's $360 million.

Iran/Saudi	6	8
3	180, 360	150, 400
5	250, 300	175, 280

a. What is Saudi Arabia's best response to Iran playing 3 million barrels per day?

b. What is Saudi Arabia's best response to Iran playing 5 million barrels per day?

c. Does Saudi Arabia have a dominant strategy?

d. What is Iran's best response to Saudi Arabia playing 6 million barrels per day?

e. What is Iran's best response to Saudi Arabia playing 8 million barrels per day?

f. Does Iran have a dominant strategy?

g. What is the maximum sum of profits for both countries possible in this game? What joint strategy or strategies leads to this outcome?

h. Is there a Nash equilibrium in this game? What is it?

Answer rating: 100% (QA)

a If Iran plays 3 million barrels per day then Saudi Arabias best response is to play 6 milli... View the full answer