Find the nash equilibrium tariff levels

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Reference no: EM131074799

Countries A and B import goods from each other. Country A’s tariff is tA percent and county B’s tariff tB percent. Given these tariffs, country A’s payoff from trade (measured in billion dollars) is 40 + 60tA – tAtB – tA2 and country B’s payoff from trade is 10 + 60tB – tAtB – tB2. (a) Assume that each country wants to maximize its payoff and they set their tariffs simultaneously. Find the Nash equilibrium tariff levels. (b) Show that both countries would be better off if they sign a trade agreement to lower their tariffs (from the equilibrium level).

Reference no: EM131074799

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