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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Consider trade relations between the United States and Mexico. Assume that the leaders of the two countries believe the payoffs to alternative trade policies are as follows:

images

a. What is the dominant strategy for the United States? For Mexico? Explain.

b. Define Nash equilibrium. What is the Nash equilibrium for trade policy?

c In 1993, the U.S. Congress ratified the North American Free Trade Agreement, in which the United States and Mexico agreed to reduce trade barriers simultaneously. Do the perceived payoffs shown here justify this approach to trade policy? Explain.

d. Based on your understanding of the gains from trade (discussed in Chapters 3 and 9), do you think that these payoffs actually reflect a nation’s welfare under the four possible outcomes?

Subpart (a):

To determine
The dominant trade strategy of United States and Mexico.

Explanation

The dominant strategy of United state and Mexico is imposing high tariff. This is explained with the help of Table A as shown below:

Table 1

United state ’s decision

Low tariff

High tariff

Mexico’s decision

Low tariff

US gain $25 dollar

Mexico gain $25 dollar

US gain $30 dollar

Mexico gain $10 dollar

High tariff

US gain $10 dollar

Mexico gain $30 dollar

US gain $20 dollar

Mexico gain $20 dollar

If Mexico selects the low tariff, then there is a possibility that Mexico would get low pay-off when U...

Subpart (b):

To determine
The dominant trade strategy of United States and Mexico.

Subpart (c):

To determine
The dominant trade strategy of United States and Mexico.

Subpart (d):

To determine
The dominant trade strategy of United States and Mexico.

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