Incorporate the concepts of game theory with international trade and tariffs. Set up two payoff matrices. Set up the first payoff matrix such that the outcome will be harmful to both countries. Set up the second payoff matrix such that the outcome will be beneficial to the United States. Evaluate the two matrices using current actions by each country to see which matrix is most likely correct. Discuss with your classmates whether or not the ensuing trade war will produce successful outcomes.
International trade can have big effects on domestic markets. For both an import good and an export good in other words, address each bulleted item below twice once for import and once for export, describe how opening up to international trade affects the following:
1. Describe the supply or demand for the particular good,
2. Explain the competitiveness of that good’s market, and
3. How the change in competitiveness affects equilibrium price and quantity?
Stepping away from the import/export examples, describe how opening up to trade specifically affects a domestic monopoly. Include an explanation, using game theory, of how even a single additional competitor can lead to a market outcome similar to perfect competition.
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