Suppose two countries are engaged in a "Cold War", i.e. no actually fighting, and must decide whether or not to build up their arsenal. Assume that each country has two strategies "Arm" and "Not Arm". The payoff to each country if both countries choose "Not Arm", i.e. the status quo, is 3 points. The cost of building up an arsenal, i.e. choosing "Arm", is 2 points. Furthermore, assume that there is a 1 point bonus to the country who chooses "Arm" when the other chooses "Not Arm", and a 3 point penalty to the country who chooses "Not Arm" when the other country chooses "Arm". a. Draw the mage matrix for this strategic interaction and fill in the values according to the description above. (2 marks) b. Find all Nash Equilibra of this game (2 marks) c. What type of game is this? Briefly explain (2 marks) d. If there is more than one Nash Equilibrium, how do we know, if at all, which one will occur. Explain briefly. 

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The strategic interaction described can be represented using a matrix known as a payoff matrix In th... View the full answer