Question 3
Two firms, A and B, are contemplating exporting a local fruit called durian to another country that has a strong demand for durian. If both firms export their durians, each firm can earn an export revenue of $25 million. If both firms do not export, each firm can earn a revenue of $12 million from their own domestic market.
If one of them exports durians and the other does not export, the firm that exports durians can earn an export revenue of $50 million. But the non-exporting firm will earn a revenue of $18 million.
(a) (b) If both firms make a decision simultaneously, construct and analyze a payoff matrix and solve for the Nash equilibrium. Explain whether this is the prisoner’s dilemma game. (13 marks) Suppose Firm A can make a decision before Firm B. Construct and analyze a decision tree model and determine the payoffs to both firms. Does timing matter in this game?
Question 2
Consider an economy where many farmers plant and sell sugar cane for a living. (a) (b) Discuss the welfare effects when the government implements a price floor in the sugar cane market to help the sugar cane farmers. Support your answers with a suitable sugar cane market diagram. Are the sugar cane farmers better off with this policy?
Explain. How would your answer be different if the government commits to buy up all the sugar cane at the floor price from the farmers and sell to the consumers at a lower price to clear the stock? Discuss and support your answers with a suitable sugar cane market diagram.
