PART 1 : Suppose a market is served by two firms (Firm A and Firm B). Firm A is
ID: 1177639 • Letter: P
Question
PART 1: Suppose a market is served by two firms (Firm A and Firm B). Firm A is located in Country A, Firm B in Country B. Both firms are considering whether to invest in a production facility in Country C to produce for the local market (i.e. for sale in C). That market is large enough so that one firm could operate profitably, but two would make small losses. The payoff matrix is as shown:
FIRM B
Invest
Don't Invest
FIRM A
Invest
A = -1; B = -1
A = 8; B = 0
Don't Invest
A = 0; B = 8
A = 0; B = 0
a. If Firm A makes its decision first, and that decision will be known to Firm B what will be the outcome?
b. Will the outcome be any different if Firm B does not know Firm A's decision (just that Firm A has committed to some strategy)? Explain
c. What is the minimum subsidy that the Government of Country B must give Firm B to ensure that it invests regardless of Firm A's decision? Explain.
d. If Country B announces this subsidy before Firm A makes is decision, what will be the outcome? Explain.
Suppose Country A were to announce a subsidy of 2 to Firm A provided it invests, before either firm or Country B had made any decision. What would be the outcome? Would Country B now have any incentive to subsidise Firm B? Explain.
PART 2: Consider the same two firms as above, but now their choices are between exporting to Country C or investing in Country C (again for the local market). If one or both firms invest in C then the C government will prohibit imports. The payoff matrix is as shown:
FIRM B
Invest
Export
FIRM A
Invest
A = 4; B = 4
A = 8; B = 0
Export
A = 0; B = 8
A = 6; B = 6
a. If each firm must make its decision without knowing the decision of the other, what will be the outcome? Explain.
b. Will the outcome be any different if one firm makes it decision before the other, and that decision is known to the second firm? Explain.
c. Is there any scope here for welfare improving subsidies by the governments of A and/or B? Explain why or why not.
FIRM B
Invest
Don't Invest
FIRM A
Invest
A = -1; B = -1
A = 8; B = 0
Don't Invest
A = 0; B = 8
A = 0; B = 0
Explanation / Answer
PART 1:
a) then the outcome will be
A=8; B=0
b)then if firm B invest in it...loss will occure
A=-1;B=-1
and if firm B do not invest...
A=8;B=0( but this case has less probability because both B does not know that A is investing in it
and B will try to invest)
c)minimum subsidy should be like that ...if A will invest then the loss occured by that will be compunsated by the subsidy.
d)then A will not invest in it because A is now knowing that B will invest . and A will get a loss .
means A=-1;B-1
but B have a subsidy
PART 2:
a)they will surly invest because they donot want to take risk by export
because if they export and other one invest then the first one will not get any profit
means A=4;B=4;
b) yes ,now second one take the same decision as first one
means ,,, A=4;B=4
or A=6;B=6
c)if any country's government improve subsidy in any country
then that company can take risk for export (without knowing the decision of other)
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