Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia and Ecuador for the production of

Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia and Ecuador for the production of oil. Saudi Arabia and Ecuador must decide how much oil to produce. Since the demand for oil is inelastic, relatively low production rates drive up prices and profits. Saudi Arabia, the world’s largest and lowest-cost producer, is able to influence market price; it has an incentive to keep output low. Ecuador, on the other hand, is a relatively high-cost producer with much smaller reserves. Assume Saudi Arabia now decides to try to further influence the oil market by offering to pay Ecuador $15 million to produce a low output.


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