Question: 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

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.

a. Assuming that the demand curve for cars in this new market is negatively sloped and unchanging, explain the economic reasoning behind the prices and profits shown in each cell in the payoff matrix.
b. What is the cooperative outcome in this game? Is it likely to be achievable? Explain.
c. What is Honda's best action? Does it depend on Toyota's action?
d. What is Toyota's best action? Does it depend on Honda's action?
e. What is the non-cooperative outcome in this game? Is it a Nash equilibrium?

Toyota's Decision Small Factory High Industry Large Factory Medium Industry Small Honda profits: Honda profits: Factory $20 million millio Toyota profts: Toyota profits: $20 million million Honda's Decision Medinm Industry Low Industry Price Large Honda profits Honda profits: Factory $25 million $14 million Toyota profits: $12 million Toyota profits: $14 million

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