Two car producers, Firm A operates in Country A and Firm B operates in Country B, are considering producing a new 8-seater Multi-Purpose Vehicle (MPV)for the international market. The payoff matrix is as follows (payoff values are in millions of dollars).
Two car producers, Firm A operates in Country A and Firm B operates in Country B, are considering producing a new 8-seater Multi-Purpose Vehicle (MPV)for the international market. The payoff matrix is as follows (payoff values are in millions of dollars).
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter7: Production, Costs, And Industry Structure
Section: Chapter Questions
Problem 25RQ: In choosing a production technology, how will firms react if one input becomes relatively more...
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Two car producers, Firm A operates in Country A and Firm B operates in Country
B, are considering producing a new 8-seater Multi-Purpose Vehicle (MPV)for
the international market. The payoff matrix is as follows (payoff values are in
millions of dollars).
The above payoffs imply that the international market demand is large enough to
support only one producer. If both firms produce, both will sustain a loss.
(i) Explain and solve for the Nash equilibrium in this game.
(ii) Suppose the government of Country A decides to subsidise Firm A with
$25 million if it produces. Revise the payoff matrix to account for this
subsidy. What is the new equilibrium outcome? Compare the two
outcomes and discuss the effect of the subsidy.
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