Temple University

Department of Economics

Economics 92, Principles of Microeconomics (Honors)

Homework 10
Trade Negotiations
A Static Game with Incomplete Information

  USA
Tough   Accommodating
No Concessions Make Concessions   No Concessions Make Concessions
China No Concessions 0, 0 -2, 0   -2, 0 5, -2
Make Concessions -2, 7 5, 5   0, 5 7, 7

In this game the US and China are negotiating a new trade treaty.  The payoffs are indices of change from the status quo that include things like economic gain, perceptions of residents of the home country, and stature in the world.   The USA negotiator, Carr Ben Steele, knows his type.  But the Chinese negotiator, Hai Lo, doesn't know know Carr's type.

Name 

1. If USA is tough, do they have a dominant strategy?

2. If USA is accommodating, do they have a dominant strategy?

3. Suppose that China is expected to play 'no concessions', what is the best USA response by a tough USA?

4.  Write out the normal or strategic form of the game.  Can you eliminate any dominated strategy plans for the USA?

Yes No

5. Let be China's prior for the probability that USA is a tough player.  For what values of will China want to play 'no concessions' against both kinds of USA player after eliminating any of the USA's dominated plans?

6. For values of below your answer to 4, what might happen? That is, will China have a dominant strategy? .  What strategy profile will be the solution to the game?

7. For values of above your answer to 4, what might happen? That is, will China have dominant strategy?    What strategy profile will be the solution to the game?