The smartphone producer controls the privacy settings on the smartphone. The smartphoneproducer chooses between lax and strict privacy settings. Consumers would prefer strictsettings. So, if the smartphone producer chooses strict settings, it can raise prices, leading toan increase of profits of $2B.The social media firm chooses whether to produce an app that runs on the smartphone'soperating system. The social media firm's profits stem primarily from the sale of advertising.The app increases the social media firm's profits by $4B if the privacy settings are lax, but by$1B if the privacy settings are strict.The app is highly valued by users, and so affects what consumers are willing to pay for thesmartphone, in turn affecting the smartphone producer's profits. Specifically: If the socialmedia firm produces the app, it increases the smartphone producer's profits by $1B if thesmartphone has strict privacy settings, and by $0.5B if the smartphone has lax privacy settings.If the smartphone producer chooses lax privacy settings, and the social media firm doesn'tproduce an app, then the profits of the two entities are $2B and $3B respectively.Part (a)Treating the setting as a simultaneous-move game, draw the game in matrix form.Part (b) Based on your answer to part (a), what outcome to you predict occurs? That is:(i) What privacy setting does the smartphone producer implement? (ii)Does the social media firm produce the app?Show your work.Part (c) Is the smartphone producer and social media firm merged to form a single firm, wouldthis change the outcome you predicted in part (b)? If so, how? If not, why not?

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The smartphone producer controls the privacy settings on the smartphone. The smartphone producer chooses between lax and strict privacy settings. Consumers would prefer strict settings. So, if the smartphone producer chooses strict settings, it can raise prices, leading to an increase of profits of $2B. The social media firm chooses whether to produce an app that runs on the smartphone's operating system. The social media firm's profits stem primarily from the sale of advertising. The app increases the social media firm's profits by $4B if the privacy settings are lax, but by $1B if the privacy settings are strict.

The smartphone producer controls the privacy settings on the smartphone. The smartphone producer chooses between lax and strict privacy settings. Consumers would prefer strict settings. So, if the smartphone producer chooses strict settings, it can raise prices, leading to an increase of profits of $2B. The social media firm chooses whether to produce an app that runs on the smartphone's operating system. The social media firm's profits stem primarily from the sale of advertising. The app increases the social media firm's profits by $4B if the privacy settings are lax, but by $1B if the privacy settings are strict.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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