Part II: Trade policies and trade international negotiations Problem 3 (7 pts). This question is related to trade polici

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Part II: Trade policies and trade international negotiations
Problem 3 (7 pts).
This question is related to trade policies and the role of trade
organizations. Assume we have two countries, Home and Foreign.
These will decide on trading with each other under either free
trade or trade barriers (such as tariffs, etc.) In the matrix below
you can see the countries (Home, Foreign), their choices (free
trade, trade barriers) and the payoffs (in the cells).
a) Trade wars will arise in the above setting, because both
countries are incentivized to have trade barriers. Explain how this
outcome is inevitable (3 pts). (4-5 sentences are expected)
b) Explain how cooperation would benefit both countries (2 pts).
(1-2 sentences are expected)
c) Explain the role of international trade agreements (such as
WTO) in avoiding trade wars (2 pts). (1-2 sentences are
expected)