Microeconomics

Question:

Consider trade relations between the Country A & Country B. Assume that the leaders of the two contries believe the payoffs to altrenative trade policies are as follows:

,,,,,,,,,,,,,,,,,,Country A
,,,,,,,,,,Low Tarriffs|High Tarriffs
,,,,,,,,,,A 25 Billion|A 30 Billion
Country B,,,,,,,,,,,,,|
Low ,,,,,,,,,,,,,,,,,,|
Tarriffs,,B 10 Billion|B 10 Billion
,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
High ,,,,,A 10 billion|A 20 Billion
Tarriffs,,,,,,,,,,,,,,|
,,,,,,,,,,B 30 Billion|B 20 Billion

What is the dominate strategy for the Country A?

The maxtrix confuses me. I picked A should be with the High Tariff and gain 30 billion. I am not sure if this is correct?

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  1. I do not think you are correct.

    First, check; does A have a maximizing strategy which is independent of what B does. If A chooses a low tarriff, the best that A can win is 25 and the worst it could win is 10. If A chooses a high tarriff, the best A can win is 30 and the worst it can win is 20. A's position, right now is uncertain.
    Now check B. If B chooses low, the best it can win is 10. If B chooses High, the WORST it can win is 20. So, B will choose a High Tarriff.

    Ok, so now A sees that B will choose a high tarriff, it's best call is to choose a low tarriff and gain 25.

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