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Question: oil producing countries need to maintain the price of oil...

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Oil producing countries need to maintain the price of oil from decreasing, and for this reason they need to limit the total production of oil. Therefore, they try to maximize their profit by predicting the production level of other countries. Consider the following hypothetical situation, where Saudi Arabia and Venezuela get varying profit margins for the oil they produce. Venezuela can either produce 1M barrels per day or 2M barrels per day, while Saudi Arabia can produce 4M barrels per day or 5M barrels per day. If the total production of the two countries is 5M barrels, then the profile margin is $16 per barrel. If the total production is 6M barrels, then the profile margin is $12 per barrel. If the total production is 7M barrels, then the profile margin is $8 per barrel.

i) Illustrate this scenario in a pay-off matrix. (6 marks)

ii) State if there are any (pure strategy) Nash equilibrium states, and which are they?(4 marks)

iii) Is there a dominant strategy for either country? (3 marks)

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