The image contains a decision-making exercise involving Saudi Arabia and Kuwait, where each country decides whether to produce a low output or a high output. The decisions and corresponding profits are shown in a payoff matrix.### Text DescriptionThe task asks about cooperative and Nash equilibria:**Cooperative Equilibrium:**1. **A.** Saudi Arabia produces a high output, Kuwait produces a low output.2. **B.** A cooperative equilibrium does not exist.3. **C.** Saudi Arabia produces a low output, Kuwait produces a high output.4. **D.** Saudi Arabia produces a low output, Kuwait produces a low output.5. **E.** Saudi Arabia produces a low output, Kuwait produces a low output. (Correct Answer)**Nash Equilibrium:**1. **A.** Saudi Arabia produces a high output, Kuwait produces a low output.2. **B.** Saudi Arabia produces a low output, Kuwait produces a low output.3. **C.** Saudi Arabia produces a high output, Kuwait produces a high output.4. **D.** Saudi Arabia produces a low output, Kuwait produces a high output.5. **E.** A Nash equilibrium does not exist.### Payoff Matrix DescriptionThe payoff matrix shows the potential outcomes for Saudi Arabia and Kuwait based on their production choices:- **Saudi Arabia:** - Low Output: Profit of $125 or $98 - High Output: Profit of $70 or $5- **Kuwait:** - Low Output: Profit of $8 or $5 - High Output: Profit of $13 or $8The matrix is divided into four quadrants:- Top Left: Saudi Arabia low, Kuwait low ($125, $8)- Top Right: Saudi Arabia low, Kuwait high ($75, $13)- Bottom Left: Saudi Arabia high, Kuwait low ($98, $5)- Bottom Right: Saudi Arabia high, Kuwait high ($70, $8)This structure helps explain how each country's choice affects both their own and the other's profits, allowing for analysis of strategic decisions.

Explanation: A cartel is termed for a group of firms that collude by agreeing to restrict output to increase prices and profits. A cooperative equilibrium is an equilibrium in a game in which players cooperate to increase their mutual payoff. In this case, if both countries Saudi Arabia and Kuwait collude and form a cartel, then their mutual payoff must be highest among the other alternatives. Following are the mutual payoffs: SA low; K low = 125 + 8 = $133 SA low; K high = 75 + 13 = $88 SA high; K low = 98 + 5 = $103 SA high ; K high = 70 + 8 = $78 => The cooperative equilibrium where joint profits are maximized occurs when each country produces a low output. It leads to a combined profit of $133, $125 from Saudi Arabia and $8 from Kuwait. Answer: E. The cooperative equilibrium is for Saudi Arabia to produce a low output and for Kuwait to produce a low output.When SA goes low, K chooses 13 as its higher than 8 When SA goes high, K chooses 8 as its higher than 5 When K goes Low, SA chooses 125 as its higher than 98 When K goes high, SA chooses 75 as its higher than 70 ---------- Kuwait ---------- Saudi Arabia Low High Low 125,8 75,13 High 98,5 70,8 => Thus, Nash equilibrium occurs when Saudi Arabia chooses low and Kuwait chooses high. Answer: D. The Nash equilibrium is for Saudi Arabia to produce a low output and for Kuwait to produce a high output.

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appose the two countries form a OA. The cooperative equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a high output. O B. A cooperative equilibrium does not exist for this game. $125 $75 Low Output O C. The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a high output. $8 $13 Saudi Arabia O D. The cooperative equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a low output. $98 $70 E. The cooperative equilibrium is for Saudi Arabia to broduce a low output and Kuwait to produce a low output. High Output $5 $8 What is the Nash equilibrium for this game? O A. The Nash equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a low output. O B. The Nash equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a low output. O C. The Nash equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a high output. S O D. The Nash equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a high output. S OE. A Nash equilibrium does not exist for this game. Clear all

appose the two countries form a OA. The cooperative equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a high output. O B. A cooperative equilibrium does not exist for this game. $125 $75 Low Output O C. The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a high output. $8 $13 Saudi Arabia O D. The cooperative equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a low output. $98 $70 E. The cooperative equilibrium is for Saudi Arabia to broduce a low output and Kuwait to produce a low output. High Output $5 $8 What is the Nash equilibrium for this game? O A. The Nash equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a low output. O B. The Nash equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a low output. O C. The Nash equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a high output. S O D. The Nash equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a high output. S OE. A Nash equilibrium does not exist for this game. Clear all

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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