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Homework #4 ( 40 points)
INTB-334, Fall 2015
Due Date: Please turn in the homework by the end of the class-period on Monday,
December 7th Regional Trade agreements
1. The below figure shows the tariff game among large countries a. Redraw the payoff matrix for a game between a large and small country. ( 8
b. What is/are the Nash equilibrium/equilibria assuming that the large country
applies an optimal tariff? ( 8 points)
d. What does your answer to (b) tell you about the role of the WTO in a situation
like this? ( 8 points) Export Subsidies in High tech industry
2. Boeing and Airbus are the world?s only major producers of large, wide-bodied aircrafts.
But with the cost of fuel increasing and changing demand in the airline industry, the need
for smaller regional jets has increased. Suppose that both firms must decide whether they
will produce a smaller plane. We will assume that Boeing has a slight cost advantage over
Airbus in both large and small planes, as shown in the following payoff matrix (in
millions of U. S. dollars). Assume that each producer chooses to either produce only
large, only small, or no planes at all. a. What is the Nash equilibrium of this game? ( 8 points) b. Are there multiple equilibria? If so, explain why. Hint: Guess at an equilibrium
and then check whether either firm would want to change its action, given the
action of the other firm. Remember that Boeing can change only its own action,
which means moving up or down a column, and likewise, Airbus can change only
its own action, which means moving back or forth on a row. ( 8 points)
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