OPEC is an official cartel of oil producing nations. The cartel operates by setting quotas for...

  

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OPEC is an official cartel of oil producing nations. The cartel operates by setting quotas for oil production for member states. When members stick to their quota, world oil prices are high. When members increase output, world price falls. While not every oil-producing country is a member of OPEC (the US is not!), the cartel is large enough to affect world prices. Cartel quotas for member states are not identical, but are based on a formula taking into account population and industry capacity. The table below shows profits for Saudi Arabia and Kuwait under the cartel quota (4m and 1m, respectively) and at higher outputs. Saudi Output 4 million 5 million Kuwait Output 1 million $64 $60 $16 $12 2 million $48 $40 $24 $16 (a) Does Kuwait have a dominant strategy in this (c) What is the Nash equilibria of this game? game? If so, what is it? (b) Does Saudi have a dominant strategy in this game? If so, what is it? (d) Saudi Arabia offers a payment to Kuwait pro- ducers to encourage cooperation with the cartel. What is the minimum payment that would in- duce Kuwait to stick with its quota? Is Saudi willing to pay this amount? OPEC is an official cartel of oil producing nations. The cartel operates by setting quotas for oil production for member states. When members stick to their quota, world oil prices are high. When members increase output, world price falls. While not every oil-producing country is a member of OPEC (the US is not!), the cartel is large enough to affect world prices. Cartel quotas for member states are not identical, but are based on a formula taking into account population and industry capacity. The table below shows profits for Saudi Arabia and Kuwait under the cartel quota (4m and 1m, respectively) and at higher outputs. Saudi Output 4 million 5 million Kuwait Output 1 million $64 $60 $16 $12 2 million $48 $40 $24 $16 (a) Does Kuwait have a dominant strategy in this (c) What is the Nash equilibria of this game? game? If so, what is it? (b) Does Saudi have a dominant strategy in this game? If so, what is it? (d) Saudi Arabia offers a payment to Kuwait pro- ducers to encourage cooperation with the cartel. What is the minimum payment that would in- duce Kuwait to stick with its quota? Is Saudi willing to pay this amount?