Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. You may find it helpful to fill in the payoff matrix below.
src="https://sciemce.com/media/4/ppg__rrr0818190951__f1q386g1.jpg" alt="" style="vertical-align: 0.0px;" height="203" width="377" />Suppose Mexico chooses first, and then OPEC, after seeing Mexico's choice, chooses second. Before Mexico chooses, OPEC tells Mexico that if Mexico cheats on the agreement, then OPEC will also cheat, and if Mexico abides by the agreement, then OPEC will also abide. This is an example of a ________, and the outcome is that ________.
A. credible threat; neither will cheat
B. commitment problem; neither will cheat
C. non-credible threat; both will cheat
D. prisoner's dilemma; both will cheat
Answer: A
Economics
src="https://sciemce.com/media/4/ppg__rrr0818190951__f1q386g1.jpg" alt="" style="vertical-align: 0.0px;" height="203" width="377" />Suppose Mexico chooses first, and then OPEC, after seeing Mexico's choice, chooses second. Before Mexico chooses, OPEC tells Mexico that if Mexico cheats on the agreement, then OPEC will also cheat, and if Mexico abides by the agreement, then OPEC will also abide. This is an example of a ________, and the outcome is that ________.
A. credible threat; neither will cheat
B. commitment problem; neither will cheat
C. non-credible threat; both will cheat
D. prisoner's dilemma; both will cheat
Answer: A
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