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Posted by on Friday, October 3, 2008 at 10:48am.

I am answered the following three mulitipul choise questions using Prisoners Dilemma Scenario. I get confused looking at the table.

Question:

Each year, the United States considers renewal of Most Favored Nation (MFN) trading status with China. Historically, legislators have made threats of not renewing MFN status because of human rights abuses in China. The non-reveal of MFN trading status is likely to involve some retaliatory measures by China. The game below reflects the potential economic gains associated with two-outcome game which (a) China may impose trade sanctions against US firms and (b) the United States may not new renew MFN status with China. The following table contains the dollar value of all trade-flow benefits to the United States and China under two trade-relationship scenarios.
_________________________________
|_____________China______________|
|____________|Imposes__|No_______|
|____________|Sanctions|Sanctions|
|______________________|_________|
|US_|Doesn't_|US Trade_|US Trade-|
|___|Renew___|=$65_____|$140_____|
|____________|Billion__|Billion__|
|____________|China____|China____|
|____________|Trade____|Trade____|
|____________|= $75____|=$5______|
|____________|Billion__|Billion__|
|________________________________|
|____Renews__|US Trade_|US Trade_|
|____________|=$35_____|=$130____|
|____________|Billion__|Billion__|
|____________|China____|China____|
|____________|Trade____|Trade____|
|____________|= $285___|=$275____|
|____________|Billion__|Billion__|
|______________________|_________|




Pursuing its own interests, China will impose trade sanctions against US firms:

A.only if the United States does not renew MFN status with China
B.only if the United States renews MFN status with China
C.regardless of whether the United States renews MFN status with China
D.None of these answers is correct. In pursuing its own best interests, China will in no case impose trade sanctions against US firms.

I picked C?

Pursuing its own best interests, the United States will renew MFN status with China:

A.only if China does not impose trade sanctions against US firms
B.only if China imposes trade sanctions against US firms
C.regardless of whether the United States renews MFN status with China
D.None of these answers is correct. In pursuing its own best interest, the United States will in no case renew MFN status with China

I picked A?

If both countries follow a dominant strategy the value of trade-flow benefits for China will be:
A.$5 billion
B.$75 billion
C.$275 billion
D.$285 billion

I picked D?

  • Microeconomics - , Friday, October 3, 2008 at 2:12pm

    Q1: I AGREE
    Q2: I would choose D. If the US doesnt renew, it gets $65 if China imposes sanctions and $65 is beter than the $35 the US would get if it renewed and China still imposed sanction.

    If the US doesnt renew and China does not impose sanctions, the US gets $140, which is better than the $130 it would get if it renewed and China still did not impose sanctions.

    Since China will impose sanctions and the US will not renew, I assert the answer to Q3 is B ($75)

  • Microeconomics - , Thursday, July 23, 2015 at 11:08am

    The manufacturer of South Face sells jackets to retail stores for $120 each, and it requires the retail stores to charge customers $150 per jacket. Any retailer that charges less than $150 would violate its contract with South Face. What do economists call this business practice?

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