4- Suppose that two motorcycle manufacturers, Honda and Suzuki, are considering offering 10-year full coverage warranties...

 

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4- Suppose that two motorcycle manufacturers, Honda and Suzuki, are considering offering 10-year full coverage warranties for their new motorcycles. Although the warranties are expensive to offer, it could be disastrous for one firm if it does not offer a warranty while its competitor does. Let's assume the payoffs for the firms are as follows: Honda Suzuki Offer Warranty Offer Warranty 20, 20 Don't Offer Warranty 120, 10 Don't Offer Warranty 10, 120 (a) If the game is played once, what is the outcome? (b) Suppose the game is repeated three times. Will the outcome change from your answer in (a)? Explain. 50,50 (c) Now, suppose the game is infinitely repeated and Suzuki and Honda formed an agreement to not offer warranties to their customers. Each firm plans the use of a grim trigger strategy to encourage compliance with the agreement. At what level of 8 (discount factor) would Honda be indifferent about keeping the agreement vs. cheating on it? Explain. 5- Two firms have technologies for producing identical paper clips. Assume that all paper clips are sold in boxes containing 100 paper clips. Firm A can produce each box at unit cost of CA = $6 whereas firm B (less efficient) at a unit cost of CB = $8. (i) Suppose that the aggregate market demand for boxes of paper clips is p = 12 - Q/2, where p is the price per box and Q is the number of boxes sold. Solve for the Nash-Bertrand equilibrium prices PÅ and PB, and the equilibrium profits and B. Explain your reasoning! (ii) Answer the previous question assuming that firm A has developed a cheaper production technology so its unit cost is now given by CA = $2. 4- Suppose that two motorcycle manufacturers, Honda and Suzuki, are considering offering 10-year full coverage warranties for their new motorcycles. Although the warranties are expensive to offer, it could be disastrous for one firm if it does not offer a warranty while its competitor does. Let's assume the payoffs for the firms are as follows: Honda Suzuki Offer Warranty Offer Warranty 20, 20 Don't Offer Warranty 120, 10 Don't Offer Warranty 10, 120 (a) If the game is played once, what is the outcome? (b) Suppose the game is repeated three times. Will the outcome change from your answer in (a)? Explain. 50,50 (c) Now, suppose the game is infinitely repeated and Suzuki and Honda formed an agreement to not offer warranties to their customers. Each firm plans the use of a grim trigger strategy to encourage compliance with the agreement. At what level of 8 (discount factor) would Honda be indifferent about keeping the agreement vs. cheating on it? Explain. 5- Two firms have technologies for producing identical paper clips. Assume that all paper clips are sold in boxes containing 100 paper clips. Firm A can produce each box at unit cost of CA = $6 whereas firm B (less efficient) at a unit cost of CB = $8. (i) Suppose that the aggregate market demand for boxes of paper clips is p = 12 - Q/2, where p is the price per box and Q is the number of boxes sold. Solve for the Nash-Bertrand equilibrium prices PÅ and PB, and the equilibrium profits and B. Explain your reasoning! (ii) Answer the previous question assuming that firm A has developed a cheaper production technology so its unit cost is now given by CA = $2.

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4 a If the game is played once the outcome would depend on the strategies chosen by Honda and Suzuki Looking at the payoffs if both firms choose to offer warranties they both receive a payoff of 20 If ... View the full answer