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# Nash equilbrium & Prisoner Dilemma

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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

2. Describe the prisonerâ??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.

#### Solution Preview

1. We draw the payoff matrix for the two countries,

England
Tariff No Tariff

T -25, -25 45, -10
China

NT -10, 45 25, 25

The Nash Equilibria here are (Tariff, No Tariff), and (No Tariff, Tariff), which corresponds with choice b and c.

Why are these Nash Equilibria? We will look at (Tariff, No Tariff). Suppose (Tariff, No Tariff) was played, can either ...

#### Solution Summary

Nash equilbrium & Prisoner Dilemma

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