9.9 Revisit the economy of San Serrife (Exercise 4.11 on page 96) Heterogene- ity amongst the inhabitants of San Serrife was ignored in the Exercise 4.11. However,
it is now known that although all San Serrife residents have prefer- ences of the form Exercise 4.2 they differ in their tastes: Northern San Ser- rifeans spend 34% of
their budget on milk and only 2% on wine, while Southern
San Serrifeans spend just 4% of their budget on milk and 32% on wine. The question of entry to the EU is to be reviewed; the consequences for the prices of milk and
wine of entry to the EU are as in Exercise 4.11.
1. Assume that there are eight times as many Southerners as Northerners in the San Serrife population, but that the average income of a Northerner is four times
that of a Southerner. On the basis of the potential-superiority criterion, should San Serrife enter the EU?
2. Suppose Northerners and Southerners had equal incomes. Should San Ser- rife enter the EU?
3. What would be the outcome of a straight vote on entry to the EU?
Mailath (1998) and Samuelson (2002). Subgame-perfection as an equilibrium concept is attributable to Selten (1965, 1975).
The folk theorem and variants on repeated games form a substantial liter- ature. For an early statement in the context of oligopoly see Friedman (1971). A key result
establishing sub-game perfection in repeated games is proved in Fudenberg and Maskin (1979).
The standard reference on industrial organisation is the thorough treatment by Tirole (1988); the original classic contributions whose logic underlies so much modern
work are to be found in Bertrand (1883), Cournot (1838) and von Stackelberg (1934).