Question 4: You are currently negotiating a supply contract with firm A. You need a com- ponent that is worth $15M to you and you can manufacture the component yourself at a cost of $10M while you know that firm A is able to deliver the component at a cost of $6M.

1. Assume the two parties expect that the outcome is determined by the Nash bargaining solution, with your bargaining power equal to 0.6 and firm A's bargaining power given by 0.4 (which determine the split of surplus). What will be the agreed-upon price and your surplus?
2. Suppose that there exists firm B, whose cost of manufacturing the same component is $7M. How much could you gain by inviting firm B to participate in the bidding process?