Problem: 1. Consider the following information, and answer the question below. China and England are international trade partners. The following data are expected payoffs for the two countries.
Both China and England use a tariff; payoff equals -25 for both nations.
Both China and England allow free trade; payoff equals 25 for both nations.
China uses a tariff, but England allows free trade; payoff is 45 for China and -10 for England.
England uses a tariff, but China allows free trade; payoff is 45 for England and -10 for China.
Which situation represents a Nash equilibrium, or the situation that occurs when both nations attempt to do what is in the best interest of each other, exclusively?
a. Both China and England allow free trade.
b. England uses a tariff, but China allows free trade
c. China uses a tariff, but England allows free trade
d. Both nations impose a tariff
Problem 2. Describe the prisoner's dilemma. Provide a numerical example using China and Mexico as the two countries, and use producing or not producing steel components as the two options facing each nation.