Question

The table below shows the payoff matrix for a game between Toyota and Honda, each of which is contemplating building a factory in a new market Each firm can other build a small factory (and produce a small number of cars) or build a large factory (and produce a large number of cars). Suppose no other car manufacturers are selling in this market Toyota's Decision Small Factory Large Factory High Industry Price Medium Industry Price Honda Profits Honda Profits: Small Factory 550 million $30 million Toyota Profits Toyota Profits 550 million $65 million Honda's Decision Medium Industry Price Low Industry Price Honda Profits Honda Profits Large Factory S65 million $35 milion Toyota Profits Toyota Profits $30 million $15 a Assuming that the demand curve for cars in this new market is negatively sloped and unchanging, which of the following explains the prices and profits shown in

options are:

b) small, large

Answer 1

a) option E - both A and B are correct

when the two firms build different size factories, yet price similarly, the firm choosing the larger factory gains at the expense of other because the output produced by larger sized factory is able to meet more demand as compared to the one with small sized factory and hence the profits of large sized factory are more.

at lower prices a larger combined output is produced and sold as the demand curve is negatively sloping (which indicates that at low prices more output is sold), but the profit margin apparently declines yielding a smaller profit.

b) small

The cooperative outcome in this game would be that both the firms build small factories because in case they both build large sized factories both will end up having less profits( payoff $35 million,$35 million). So by building small sized factories both increase their profits.(payoff $50 million, $50 million)

c) According to payoff matrix, Honda's best action depends on Toyota's action

In case Toyota decides to build a small sized factory, then honda's best decision would be to build a large sized factory. By doing so Honda can increase it's profits( Honda's profit would be $65 million). In case Toyota decides to build a large sized factory, Honda's best decision would be to build a large sized factory and sell a combined larger output to increase it's profit( Honda's profit would be $35 million). So Honda's best action depends on Toyota's action.

d) According to payoff matrix, Toyota's best action depends on Honda's action

In case Honda decides to build a small sized factory, then toyota's best decision would be to build a large sized factory. By doing so Toyota can increase it's profit( Toyota;s profit will be $65 million). In case Honda decides to build a large sized, Toyota's best decision will be to build a large sized factory and sell a combined larger output to increase it's profit( Toyota's profit will be $35 million). So Toyota's best action depends on Honda's action.