Consider trede relations between the United States and Mexico. Assume that the l

Question

Consider trede relations between the United States and Mexico. Assume that the leaders of the two countries belleve the payoffs to altemative trade polidles are shown in the following payoff matrix: United States Decision High Tarits Low Tarfts $25 billon, $25 billion $10 billion, $30 bilion Mexicos Decision High Tarits 530 bilion, 510 biltion $20 billion, $20 billion me dominant ategy for the United States is to always choose- tart. The domment strategy tr Amico is to aendho True or hie: The Nash equibrum ome fr hade polcy "sfor both the unted States and Mexico to have low tamm. In 1993, the U.S. Congress ratified the North American Free Trade Agreement, in which the United Stabes and Mexico agreed to reduce trade barriens True or Faise: Given the trade strategy decisions in the table, both counbries are better offf with this new trade pollcy 8

Explanation / Answer

So, here the only NE is (High tariff, High tariff), => this statement is “FALSE”.

So, if US and Mexico reduces the trade barriers simultaneously, => both country will be better off, “TRUE”. As we can see that at the “low tariff” both country are getting more payoff compared to “high tariff”. So, this “TRUE” that if both country will reduce trade barriers => both of them will be better off.

The other 2 are not follows the above statement, because its TRUE that if both country reduce trade berries then both of them will be better off, but if one is imposing lower tariff and the other one is imposing higher tariff, then the one who are imposing higher tariff will be better off compared to no barrier.

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