Consider a small economy with only 2 banks, DSB and TKB, in the banking industry. Both banks have to decide whether to charge high or low interest rates. If both banks charge a high interest rate, DSB will earn $200m while TKB will earn $85m. If both banks charge a low interest rate, DSB will earn $250m while TKB will earn $400m. If DSB charges a higher interest rate while TKB charges a low interest rate, DSB will earn $300m while TKB will earn $65m. If DSB charges a low interest rate while TKB charges a high interest rate, DSB will eam $75m while TKB will earn $500m. Construct the payoff matrix for the earning of both banks, apply game theory concepts and solve for the Nash equilibrium and explain whether this is a prisoner's dilemma game.

Consider a small economy with only 2 banks, DSB and TKB, in the banking industry. Both banks have to decide whether to charge high or low interest rates. If both banks charge a high interest rate, DSB will earn $200m while TKB will earn $85m. If both banks charge a low interest rate, DSB will earn $250m while TKB will earn $400m. If DSB charges a higher interest rate while TKB charges a low interest rate, DSB will earn $300m while TKB will earn $65m. If DSB charges a low interest rate while TKB charges a high interest rate, DSB will eam $75m while TKB will earn $500m. Construct the payoff matrix for the earning of both banks, apply game theory concepts and solve for the Nash equilibrium and explain whether this is a prisoner's dilemma game.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter17: Financial Markets

Section: Chapter Questions

Problem 3SCQ: Calculate the equity each of these people has in his or her home: Fred just bought a house for...

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