Consider the market for oil. Suppose for simplicity that there are only two oil producing countrieslong dashSaudi Arabia and Kuwait. Both countries must choose whether to produce a low output or a high output. These output strategies with corresponding profits are depicted in the payoff matrixLOADING... to the right. Kuwait's profits are in red and Saudi Arabia's are in blue. Suppose the two countries form a cartelLOADING What is the cooperative equilibrium

Nash Equilibrium : Each player at best strategy action, given other player strategy action.

Nash Equilibrium for Saudi Arabia, Kuwait : {High Output, High Output}

Explanation:

Considering the pay off matrix for Kuwait & Saudi Arabia, for making low or high output , to be : [First payoff Saudi, Second Payoff Kuwait]

                                                        Kuwait

                                            Low Output   High Output

Saudi Arabia    Low Output  (120,10)            (80,20)

                       High Output    (105,8)             (90,15)

Nash Equilibrium is a game theory concept, determined at the -  best strategy action for each player, given other player's strategy action.

In this case :

So, its best for Saudi Arabia to produce high output if Kuwait produces high output. Its also best for Kuwait to produce high output if Saudi Arabia produces high output.  

Hence {High Output, High Output} is the Nash Equilibrium.

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