Answer to Question #201262 in Microeconomics for Ali Hussain

Question

Two major sellers Suzuki and Honda rule Pakistan’s automobile market as the oligopolistic market. They jointly determine the price and output each firm would charge. However, if each firm constitutes its own self-interest they can maximizes their profit. Either of the company can produce one car, while the values in the matrix shows the profit for respective car. Use game theoryto answer the questions.

 

Honda

Suzuki

Accord

City

Alto

15,000

30,000

70,000

90,000

Celerio

50,000

35,000

102,000

83,000

 

a. Explain the game theory between Honda and Suzuki in the given context.​2 Marks

b. If Suzuki wants to assemble Alto and Honda assembles City, how much profit will Honda get?​​​​​​​​​​1 Mark

 

Answer 1

Solution:

a). In this game theory, both the companies Honda and Suzuki have the option of producing 2 different cars. Both the firms will look to maximize their profits and their decision will also be interdependence, which means that the actions of one firm will affect the outcomes of another firm. One firm must think about their choices strategically to attain their objectives.

b.). When Honda assembles, it will choose the dominant strategy which will enable Honda to make a lot of profit than Suzuki. The dominant strategy is to assemble City at a profit of 90,000 and 83,000.

Therefore, Honda will get a total profit of 173,000.