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 $2 billion. If neither company adopts the side-impact airbag technology, each company will earn $3.5 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. If you were a decision-maker at Honda, would you make side-impact airbags standard equipment? Explain.

Answer 1

Both the companies will make airbags.

Step-by-step explanation:

As per the data given in the question,

Toyota make Toyota don't make

Honda make $2,$2 $4.5,$0.5

Honda don't make $0.5,$4.5 $3.5,$3.5

In this given situation we must find the nash equilibrium :

As Honda contrasts payoffs vertically in the first column, and in the second column, Toyota compares them horizontally.

In this case, both companies have a dominant strategy to manufacture the airbags, so will both start making airbags.