Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC stick to the agreement OPEC will earn profits of $200 million and Mexico will earn profits of $100 million. If both Mexico and OPEC cheat then OPEC will earn $175 million and Mexico will earn $80 million. If only OPEC cheats, then OPEC earns $185 million and Mexico $60 million. If only Mexico cheats, then Mexico earns $110 million and OPEC $150 million.
OPEC Cheat Abide Cheat Mexico Abide a. Fill in the chart.
b. Does Mexico have a dominant strategy? If so, what is it?
c. Does OPEC have a dominant strategy? If so, what is it?
d. Is there a Nash equilibrium? If so, what is it?
e. Is this game an example of a prisoner’s dilemma? Why or why not?
