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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 bu factory (and produce a large number of cars). Suppose no other car manufacturers are selling in this market. Toyota's Decision Small Factory High Industry Price Honda Profits: $20 million Toyota Profits: $20 million Medium Industry Price Large Factory Medium Industry Price Honda Profits: $12 million Toyota Profits: $25 million Low Industry Price Honda Profits: $14 million Toyota Profits: $14 million Small Factory Honda's Decision Honda Profits: $25 million Toyota Profits: $12 million Large Factory 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? 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.

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 bu factory (and produce a large number of cars). Suppose no other car manufacturers are selling in this market. Toyota's Decision Small Factory High Industry Price Honda Profits: $20 million Toyota Profits: $20 million Medium Industry Price Large Factory Medium Industry Price Honda Profits: $12 million Toyota Profits: $25 million Low Industry Price Honda Profits: $14 million Toyota Profits: $14 million Small Factory Honda's Decision Honda Profits: $25 million Toyota Profits: $12 million Large Factory 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? 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.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Why E is correct?

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 bu factory (and produce a large number of cars). Suppose no other car manufacturers are selling in this market. Toyota's Decision Large Factory Medium Industry Price Honda Profits: Small Factory High Industry Price Honda Profits: Small Factory $20 million Toyota Profits: $20 million Medium Industry Price $12 million Toyota Profits: $25 million Honda's Decision Low Industry Price Honda Profits: Honda Profits: $25 million Toyota Profits: $12 million $14 million Toyota Profits: $14 million Large Factory 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? 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. 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. 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. D. All of the above are correct. E. Both A and B are correct.
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 bu factory (and produce a large number of cars). Suppose no other car manufacturers are selling in this market. Toyota's Decision Large Factory Medium Industry Price Honda Profits: Small Factory High Industry Price Honda Profits: Small Factory $20 million Toyota Profits: $20 million Medium Industry Price $12 million Toyota Profits: $25 million Honda's Decision Low Industry Price Honda Profits: Honda Profits: $25 million Toyota Profits: $12 million $14 million Toyota Profits: $14 million Large Factory 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? 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. 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. 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. D. All of the above are correct. E. Both A and B are correct.
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