Reference no: EM131094467
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 either 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 (All figures are in million dollars).
Toyota’s Decision
Small Factory Large Factory
High Industry Price Medium Industry Price
Small Factory
Honda profits = $20 Honda profits = $12
Toyota profits = $20 Toyota profits = $25
Honda’s Decision
Medium Industry Price Low Industry Price
Large Factory
Honda profits= $25 Honda profits = $14
Toyota profits= $12 Toyota profits = $14
1. Assuming that the demand curve for cars in this new market is negatively sloped and unchanging, explain the economic reasoning behind the prices and profits shown in each cell in the payoff matrix.
2. What is the cooperative outcome in this game? Is it likely to be achievable? Explain.
3. What is Honda’s best action? Does it depend on Toyota’s action?
4. What is Toyota’s best action? Does it depend on Honda’s action?
5. What is the non-cooperative outcome in this game? Is it Nash equilibrium?
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