The table below shows the payoff matrix for a game between Toyota and Honda, each f 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 number of cars). Suppose no other car manufacturers are selling in this market. Honda's Decision- come would be that h factorion Small Factory High Industry Price Honda Profits: Small Factory $50 million Toyota's Decision Toyota Profits: $50 million Medium Industry Price Honda Profits: Large Factory Medium Industry Price Honda Profits: $30 million Toyota Profits: $65 million Large Factory $65 million Toyota Profits: $30 million $35 million Toyota Profits: $35 million 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 the payoff matrix? Low Industry Price Honda Profits: OA. At lower prices a larger combined output is produced and sold, but the profit margin (P-ATC) per vehicle apparently declines more than enough to offset the higher industry volume, yielding a smaller combined profit. OB. When the two firms build different size factories, yet price similarly, the firm choosing the larger factory gains at the expense of the other. OC. When the two firms build different size factories, yet price similarly, the firm choosing the smaller factory gains at the expense of the other. OD. All of the above are correct. E. Both A and B are correct.
The table below shows the payoff matrix for a game between Toyota and Honda, each f 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 number of cars). Suppose no other car manufacturers are selling in this market. Honda's Decision- come would be that h factorion Small Factory High Industry Price Honda Profits: Small Factory $50 million Toyota's Decision Toyota Profits: $50 million Medium Industry Price Honda Profits: Large Factory Medium Industry Price Honda Profits: $30 million Toyota Profits: $65 million Large Factory $65 million Toyota Profits: $30 million $35 million Toyota Profits: $35 million 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 the payoff matrix? Low Industry Price Honda Profits: OA. At lower prices a larger combined output is produced and sold, but the profit margin (P-ATC) per vehicle apparently declines more than enough to offset the higher industry volume, yielding a smaller combined profit. OB. When the two firms build different size factories, yet price similarly, the firm choosing the larger factory gains at the expense of the other. OC. When the two firms build different size factories, yet price similarly, the firm choosing the smaller factory gains at the expense of the other. OD. All of the above are correct. E. Both A and B are correct.
Chapter15: Imperfect Competition
Section: Chapter Questions
Problem 15.5P
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Transcribed Image Text: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.
Honda's Decision
b. The cooperative outcome in this game would be that both firms build
Small Factory
factories.
Toyota's Decision
Large Factory
Medium Industry Price
Honda Profits:
$30 million
Toyota Profits:
$65 million
Low Industry Price
Honda Profits
Small Factory
High Industry Price
Honda Profits:
$50 million
Toyota Profits:
$50 million
Large Factory $65 million
Toyota Profits:
$30 million
$35 million
Toyota Profits:
$35 million
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 the payoff matrix?
Medium Industry Price
Honda Profits:
O A. At lower prices a larger combined output is produced and sold, but the profit margin (P-ATC) per vehicle apparently declines more than enough to offset the higher industry volume, yielding a smaller combined profit.
O B. When the two firms build different size factories, yet price similarly, the firm choosing the larger factory gains at the expense of the other.
O C. When the two firms build different size factories, yet price similarly, the firm choosing the smaller factory gains at the expense of the other.
O D. All of the above are correct.
E. Both A and B are correct.
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