Question

Suppose toyota and honda must decide whether to make a new breed of side-impact airbags standard equipment on all models. side-impact airbags raise the price of each automobile by $1,000. if both firms make side-impact airbags standard equipment, each company will earn profits of $3.5 billion. if neither company adopts the side-impact airbag technology, each company will earn $2 billion. if one company adopts the technology as standard equipment and the other does not, the adopting company will earn a profit of $4.5 billion and the other company will earn $0.5 billion.

Answer 1

If i were a decision maker at Honda, i would make side-impact airbags standard equipment because it will tend to give me maximum and higher profit.

Explanation:

Toyota

Adopt, Not Adopt

Honda Adopt 3.5, 3.5 4.5, 0.5

Not Adopt 0.5, 4.5 2, 2

To adopt side airbags or not adopt them are the two strategies to use because if Honda chooses to adopt for side bags, then Toyota will also decide and choose to adopt them as it gets a higher pay-off.(3.5 > 0.5) and when Honda chooses to not adopt for side-bags, then Toyota will choose to adopt them due to the fact that it gives a higher pay-off.(4.5 > 2)

Furthermore when Toyota chooses to adopt for side bags, Honda will choose to adopt as it gives a higher pay-off.(3.5 > 0.5)

When Toyota chooses not to adopt the side bags, Honda will go ahead and choose for the side bags, as it gives him a higher pay-off.(4.5> 2)

Hence the Nash equilibrium will be to adopt for side bags for both the teo companies = (Adopt, Adopt) = (3.5, 3.5)

Therefore If i were a decision maker at Honda, i would make side-impact airbags standard equipment because it will tend to give me maximum and higher profit that I desired