Question

In: Economics

The United States claims that Canada subsidizes the production of softwood lumber and that imports of...

The United States claims that Canada subsidizes the production of softwood lumber and that imports of lumber damage the interests of US producers.  The United States has imposed a high tariff on Canadian imports to counter the subsidy.  Canada is thinking of retaliating by refusing to export water to California.  The following table shows the payoff matrix for the simultaneous game that Canada and the US are playing

Canada
Export Don’t Export
United No Tariff 50, 5 100, 10
States Tariff 75, 75 150, 90

a.       What is the US’ optimal strategy? Why?

b.       What is Canada’s optimal strategy? Why?

c.       What is the outcome of the game? Explain.

d.       Is this game like a Prisoner’s Dilemma game or different in some crucial way? Explain.

e.       Which country would benefit more from a free trade agreement (where only the strategy of “no tariff” is allowed)?

Solutions

Expert Solution

United States has a dominant strategy of imposing a tariff. Note that a strategy is dominant when it results in best payoff irrespective of the strategies selected by the rival. In this case when tariff is imposed by the United States, profits are greater at 75 and 150 when tariff is imposed.

Canada has a dominant strategy of not exporting. This is because Canada has a greater profit of 10 and 90 when it decides not to export from the United States

The outcome of the game is that the United States will impose tariff and Canada will not export. The resultant outcome has a payoff of 150 to the United States and 90 to Canada

This game is not similar to the case of prisoners dilemma because here the selected outcome has the highest pay off and even if communication was established between the two States they would have selected the same strategy set

United States will experience a greater benefit. When there is not tariff, Canada will still not export and therefore the benefit to the United States would be 100 while Canada will be getting only 10.

Rahul Sunny answered 1 year ago
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