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The car manufacturer Setla negotiates with battery producer Volt over buying a larg number of batteries for their electric cars. When using Volt's regular line of batteries, Setla profit would be £12M minus whatever Setla pays for the batteries. However, with 25 probability the demand for electric cars might crash as hydrogen cars become more popula In that case, Setla's profit from their electric cars would be zero, less whatever they wou pay for the batteries. Volt's costs of producing the agreed number of batteries would b £8M. After the contract has been negotiated, but before it becomes known whether electric car are still going to be popular (i.e., whether Setla's profits are going to be high), Volt ma spend £1M on a new machine which can produce batteries the shape of which better fits Setla's car design, resulting in a much larger boot capacity for Setla's cars. If Volt produce

The car manufacturer Setla negotiates with battery producer Volt over buying a larg number of batteries for their electric cars. When using Volt's regular line of batteries, Setla profit would be £12M minus whatever Setla pays for the batteries. However, with 25 probability the demand for electric cars might crash as hydrogen cars become more popula In that case, Setla's profit from their electric cars would be zero, less whatever they wou pay for the batteries. Volt's costs of producing the agreed number of batteries would b £8M. After the contract has been negotiated, but before it becomes known whether electric car are still going to be popular (i.e., whether Setla's profits are going to be high), Volt ma spend £1M on a new machine which can produce batteries the shape of which better fits Setla's car design, resulting in a much larger boot capacity for Setla's cars. If Volt produce

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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Question 2 The car manufacturer Setla negotiates with battery producer Volt over buying a large number of batteries for their electric cars. When using Volt's regular line of batteries, Setla's profit would be £12M minus whatever Setla pays for the batteries. However, with 25% probability the demand for electric cars might crash as hydrogen cars become more popular. In that case, Setla's profit from their electric cars would be zero, less whatever they would pay for the batteries. Volt's costs of producing the agreed number of batteries would be £8M. After the contract has been negotiated, but before it becomes known whether electric cars are still going to be popular (i.e., whether Setla's profits are going to be high), Volt may spend £1M on a new machine which can produce batteries the shape of which better fits to Setla's car design, resulting in a much larger boot capacity for Setla's cars. If Volt produces these improved batteries, and the event occurs where electric cars are popular, Setla's profit will increase to £16M (less the payment for the batteries). If instead hydrogen cars become popular, Setla's profit would still be zero (less the payment for the batteries). Volt's cost of producing the batteries will be the same (£8M) with or without the investment. The contract can only specify whether Setla and Volt trade and, if so, at which price, but cannot be contingent on the shape of the batteries. Assume that Setla and Volt agree on a total contractual price of £10M for all batteries. Furthermore, contract law stipulates "specific performance", and both firms have equal relative bargaining power. (a) Assume that Volt hasn't made the investment. Depending on whether the event where electric cars or hydrogen cars are popular occurs, determine whether Setla and Volt trade and each firm's expected profit? (b) Repeat (a) under the assumption that Volt has made the investment. (c) Is it profitable for Volt to make the investment? (d) Is joint payoff greater with or without the investment? (e) Briefly comment on your results, taking into account the nature of investment and the contract.
Transcribed Image Text:Question 2 The car manufacturer Setla negotiates with battery producer Volt over buying a large number of batteries for their electric cars. When using Volt's regular line of batteries, Setla's profit would be £12M minus whatever Setla pays for the batteries. However, with 25% probability the demand for electric cars might crash as hydrogen cars become more popular. In that case, Setla's profit from their electric cars would be zero, less whatever they would pay for the batteries. Volt's costs of producing the agreed number of batteries would be £8M. After the contract has been negotiated, but before it becomes known whether electric cars are still going to be popular (i.e., whether Setla's profits are going to be high), Volt may spend £1M on a new machine which can produce batteries the shape of which better fits to Setla's car design, resulting in a much larger boot capacity for Setla's cars. If Volt produces these improved batteries, and the event occurs where electric cars are popular, Setla's profit will increase to £16M (less the payment for the batteries). If instead hydrogen cars become popular, Setla's profit would still be zero (less the payment for the batteries). Volt's cost of producing the batteries will be the same (£8M) with or without the investment. The contract can only specify whether Setla and Volt trade and, if so, at which price, but cannot be contingent on the shape of the batteries. Assume that Setla and Volt agree on a total contractual price of £10M for all batteries. Furthermore, contract law stipulates "specific performance", and both firms have equal relative bargaining power. (a) Assume that Volt hasn't made the investment. Depending on whether the event where electric cars or hydrogen cars are popular occurs, determine whether Setla and Volt trade and each firm's expected profit? (b) Repeat (a) under the assumption that Volt has made the investment. (c) Is it profitable for Volt to make the investment? (d) Is joint payoff greater with or without the investment? (e) Briefly comment on your results, taking into account the nature of investment and the contract.
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Question 2 The car manufacturer Setla negotiates with battery producer Volt over buying a large number of batteries for their electric cars. When using Volt's regular line of batteries, Setla's profit would be £12M minus whatever Setla pays for the batteries. However, with 25% probability the demand for electric cars might crash as hydrogen cars become more popular. In that case, Setla's profit from their electric cars would be zero, less whatever they would pay for the batteries. Volt's costs of producing the agreed number of batteries would be £8M. After the contract has been negotiated, but before it becomes known whether electric cars are still going to be popular (i.e., whether Setla's profits are going to be high), Volt may spend £1M on a new machine which can produce batteries the shape of which better fits to Setla's car design, resulting in a much larger boot capacity for Setla's cars. If Volt produces these improved batteries, and the event occurs where electric cars are popular, Setla's profit will increase to £16M (less the payment for the batteries). If instead hydrogen cars become popular, Setla's profit would still be zero (less the payment for the batteries). Volt's cost of producing the batteries will be the same (£8M) with or without the investment. The contract can only specify whether Setla and Volt trade and, if so, at which price, but cannot be contingent on the shape of the batteries. Assume that Setla and Volt agree on a total contractual price of £10M for all batteries. Furthermore, contract law stipulates "specific performance", and both firms have equal relative bargaining power. (a) Assume that Volt hasn't made the investment. Depending on whether the event where electric cars or hydrogen cars are popular occurs, determine whether Setla and Volt trade and each firm's expected profit? (b) Repeat (a) under the assumption that Volt has made the investment. (c) Is it profitable for Volt to make the investment? (d) Is joint payoff greater with or without the investment? (e) Briefly comment on your results, taking into account the nature of investment and the contract.
Transcribed Image Text:Question 2 The car manufacturer Setla negotiates with battery producer Volt over buying a large number of batteries for their electric cars. When using Volt's regular line of batteries, Setla's profit would be £12M minus whatever Setla pays for the batteries. However, with 25% probability the demand for electric cars might crash as hydrogen cars become more popular. In that case, Setla's profit from their electric cars would be zero, less whatever they would pay for the batteries. Volt's costs of producing the agreed number of batteries would be £8M. After the contract has been negotiated, but before it becomes known whether electric cars are still going to be popular (i.e., whether Setla's profits are going to be high), Volt may spend £1M on a new machine which can produce batteries the shape of which better fits to Setla's car design, resulting in a much larger boot capacity for Setla's cars. If Volt produces these improved batteries, and the event occurs where electric cars are popular, Setla's profit will increase to £16M (less the payment for the batteries). If instead hydrogen cars become popular, Setla's profit would still be zero (less the payment for the batteries). Volt's cost of producing the batteries will be the same (£8M) with or without the investment. The contract can only specify whether Setla and Volt trade and, if so, at which price, but cannot be contingent on the shape of the batteries. Assume that Setla and Volt agree on a total contractual price of £10M for all batteries. Furthermore, contract law stipulates "specific performance", and both firms have equal relative bargaining power. (a) Assume that Volt hasn't made the investment. Depending on whether the event where electric cars or hydrogen cars are popular occurs, determine whether Setla and Volt trade and each firm's expected profit? (b) Repeat (a) under the assumption that Volt has made the investment. (c) Is it profitable for Volt to make the investment? (d) Is joint payoff greater with or without the investment? (e) Briefly comment on your results, taking into account the nature of investment and the contract.
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