You are the manager of a firm that manufactures front and rear windshields for the automobile industry. Due to economies of scale in the industry, entry by new firms is not profitable. Toyota has asked your company and your only rival to simultaneously submit a price quote for supplying 100,000 front and rear windshields for its new Highlander. If both you and your rival submit a low price, each firm supplies 50,000 front and rear windshields and earns a $1 million in profits. If one firm quotes a low price and the other a high price, the low-price firm supplies 100,000 front and rear windshields and earns a profit of $11 million and the high-price firm supplies no windshields and loses $2 million. If both firms quote a high price, each firm supplies 50,000 front and rear windshields and earns a $6 million profit. The new Highlander is a “special edition” that will be sold only for one year. a. Supported by this information, complete the payoff matrix. (values are in million) Rival LP (Low Price) HP (High Price) You LP (Low Price) K1, S1 K2, S2 HP (High Price) K3, S3 K4, S4 New information indicates that you and your rival can resubmit price quotes year after year and the current market rate of return is 18%. Supported by this information, complete the payoff matrix. (values are in million). Instructions: Round up your answers to one decimal. Rival LP (Low Price) HP (High Price) You LP (Low Price) K5, S5 K6, S6 HP (High Price) K7, S7 K8, S8 C. K5 = , S5 = , K6 = , S6 = K7 = , S7 = , K8 = , S8 = - d. The Nash equilibrium of this game is: (A, B, C, or D) (LP, LP) B. (HP, HP) C. There is no NE D. (LP, LP) and (HP, HP)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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You are the manager of a firm that manufactures front and rear windshields for the automobile industry. Due to economies of scale in the industry, entry by new firms is not profitable. Toyota has asked your company and your only rival to simultaneously submit a price quote for supplying 100,000 front and rear windshields for its new Highlander. If both you and your rival submit a low price, each firm supplies 50,000 front and rear windshields and earns a $1 million in profits. If one firm quotes a low price and the other a high price, the low-price firm supplies 100,000 front and rear windshields and earns a profit of $11 million and the high-price firm supplies no windshields and loses $2 million. If both firms quote a high price, each firm supplies 50,000 front and rear windshields and earns a $6 million profit. The new Highlander is a “special edition” that will be sold only for one year.

a. Supported by this information, complete the payoff matrix. (values are in million)

		Rival
		LP (Low Price)	HP (High Price)
You	LP (Low Price)	K1, S1	K2, S2
	HP (High Price)	K3, S3	K4, S4

New information indicates that you and your rival can resubmit price quotes year after year and the current market rate of return is 18%. Supported by this information, complete the payoff matrix. (values are in million).

Instructions: Round up your answers to one decimal.

		Rival
		LP (Low Price)	HP (High Price)
You	LP (Low Price)	K5, S5	K6, S6
	HP (High Price)	K7, S7	K8, S8

K5 = , S5 = , K6 = , S6 =

K7 = , S7 = , K8 = , S8 =

d. The Nash equilibrium of this game is: (A, B, C, or D)

(LP, LP) B. (HP, HP) C. There is no NE D. (LP, LP) and (HP, HP)

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