Question 3

Consider a "game" between Commonwealth Bank (CBA) and ANZ Bank (ANZ) that the banks may participate in.

The rules of the game are:

• If both CBA and ANZ keep interest rates low, then they will both make a profit of $2.5b.
• If both CBA and ANZ keep interest rates high, then they will both make a profit of $3.5b.
• If one bank keeps interest rates low and the other keeps interest rates high, then the low interest rate bank will make $4.0b profit and the high interest rate bank will make $2.0b profit.

Using these rules, solve this game for the Nash equilibrium (make sure to include your diagram and the logic you followed to solve the game). Is your outcome the best one for both CBA and ANZ? Explain your answer.

Please answer this question with diagram as well!! thank you!