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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Question

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.

Firm A
Don't Produce
Produce
Produce
-$5 for each
s100 for Firm B
$O for Firm A
| Firm B
Don't Produce
So for Firm B
$100 for Firm A
$O for each

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