Question

In: Economics

A computer manufacturer, firm A, is considering whether or not to move from the USB-C connector...

A computer manufacturer, firm A, is considering whether or not to move from the USB-C connector standard to a new, more efficient and cheaper to produce standard called USB4. Most of the accessories for firm A’s computers are produced by firm B. In turn, firm B’s accessories are mainly sold to people using firm A computers. Firm B is currently using the USB-C interface for all the accessories it makes and has been told about firm A considering USB4. Analyse the interaction between the two firms using game theory. Present a payoff matrix to model the situation and analyse it for Nash equilibrium. Which is the best outcome for each firm? Which is the best outcome for society as a whole? What can be done by the firms or government to make society’s best outcome more likely?

Solutions

Expert Solution

firm B
firm A new old
new 8, 8 3, -2
old 4, -3 5, 5

If both firm A and B follow new technology, they get the highest payoff,(8,8). If both follow old technology, their payoff is positive, but not as high as new technology would fetch. If one follows old and the other new, then firm A still has a positive payoff, but lower, as he has to find new suppliers. Firm B will lose firm A which leads to a considerable loss.

Firm A knows that firm B has to follow him and do what he does in order to have his business. If he adopts new, firm B will adopt new. If he adopts old, firm B will also adopt old. So, (New, New) and (Old, Old) are the two Nash equilibria.

But, for firm A, between the two options, higher payoff is if he adopts the new technology - USB4. So he will adopt new technology and firm B also follows. The outcome here is (New, New) with payoff (8, 8).

This is good for the society too. New technology is cheaper. So price will be lower. More consumers can afford it now. This increases social welfare as consumer welfare will be more. Producer welfare will also increase as there is more production to meet the increased demand.

The government can decrease taxes on firm A so that it serves as a great incentive to choose USB4, which is more efficient. Moreover, it can instal the new technology in all its departments which will lead to increased demand too.


Related Solutions

A computer manufacturer, firm A, is considering whether or not to move from the USB-C connector...
A computer manufacturer, firm A, is considering whether or not to move from the USB-C connector standard to a new, more efficient and cheaper to produce standard called USB4. Most of the accessories for firm A’s computers are produced by firm B. In turn, firm B’s accessories are mainly sold to people using firm A computers. Firm B is currently using the USB-C interface for all the accessories it makes and has been told about firm A considering USB4. Analyse...
A computer manufacturer, firm A, is considering whether or not to move from the USB-C connector...
A computer manufacturer, firm A, is considering whether or not to move from the USB-C connector standard to a new, more efficient and cheaper to produce standard called USB4. Most of the accessories for firm A’s computers are produced by firm B. In turn, firm B’s accessories are mainly sold to people using firm A computers. Firm B is currently using the USB-C interface for all the accessories it makes and has been told about firm A considering USB4. Analyse...
A computer manufacturer, firm A, is considering whether or not to move from the USB-C connector...
A computer manufacturer, firm A, is considering whether or not to move from the USB-C connector standard to a new, more efficient and cheaper produce standard called USB4. Most of the accessories for firm A's computers are produced by firm B. In turn, firm B's accessories are mainly sold to people using firm A computers. Firm B is currently using the USB-C interface for all the accessories it makes and has been told about firm A considering USB4. Analyse the...
A firm is considering whether to install a new computer system. The computer system costs $800,000...
A firm is considering whether to install a new computer system. The computer system costs $800,000 today and is expected to increase the firm’s productivity so much that the firm will earn $250,000 each year for four years starting one year from today. If the real interest rate is 10%, should the firm install the new computer system? (Make sure that you show the formula in your answer. Show your work.)
USCom, a US computer manufacturer, will be delivering a large computer system to a German firm...
USCom, a US computer manufacturer, will be delivering a large computer system to a German firm in six months. USCom expects to receive a payment of €1.5 million at that time. Currently the spot rate is US $1.45/€, and the six-month forward rate is US $1.47/€. Suppose that the firm also has the following information from the options market: Six-month call option premium is US $0.0195 per euro and the exercise price is $1.42, Six-month call option premium is US...
DMW, a German auto manufacturer, is considering the sourcing of certain components from India. The firm...
DMW, a German auto manufacturer, is considering the sourcing of certain components from India. The firm estimates a requirement of 150,000 units a year. The component is currently manufactured in- house at a cost of EUR 30. The Indian firm offers a four- year agreement to manufacture this component for rupee (INR) 1,500 per unit. The German firm also bears shipping costs of EUR 3 per component. Assume a discount rate of 9 percent. Spot EURINR equals 65. What is...
"A firm is considering purchasing a computer system. -Cost of system is $191,000. The firm will...
"A firm is considering purchasing a computer system. -Cost of system is $191,000. The firm will pay for the computer system in year 0. -Project life: 5 years -Salvage value in year 0 (constant) dollars: $13,000 -Depreciation method: five-years MACRS -Marginal income-tax rate = 37% (remains constant over time) -Annual revenue = $146,000 (year-0 constant dollars) -Annual expenses (not including depreciation) = $77,000 (year-0 constant dollars) If the general inflation rate is 3.7% during the project period (which will affect...
"A firm is considering purchasing a computer system. -Cost of system is $128,000. The firm will...
"A firm is considering purchasing a computer system. -Cost of system is $128,000. The firm will pay for the computer system in year 0. -Project life: 5 years -Salvage value in year 0 (constant) dollars: $12,000 -Depreciation method: five-years MACRS -Marginal income-tax rate = 37% (remains constant over time) -Annual revenue = $128,000 (year-0 constant dollars) -Annual expenses (not including depreciation) = $94,000 (year-0 constant dollars) If the general inflation rate is 2.6% during the project period (which will affect...
"A firm is considering purchasing a computer system. -Cost of system is $188,000. The firm will...
"A firm is considering purchasing a computer system. -Cost of system is $188,000. The firm will pay for the computer system in year 0. -Project life: 4 years -Salvage value in year 0 (constant) dollars: $24,000 -Depreciation method: five-years MACRS -Marginal income-tax rate = 40% (remains constant over time) -Annual revenue = $141,000 (year-0 constant dollars) -Annual expenses (not including depreciation) = $75,000 (year-0 constant dollars) If the general inflation rate is 2.1% during the project period (which will affect...
"A firm is considering purchasing a computer system. -Cost of system is $199,000. The firm will...
"A firm is considering purchasing a computer system. -Cost of system is $199,000. The firm will pay for the computer system in year 0. -Project life: 5 years -Salvage value in year 0 (constant) dollars: $17,000 -Depreciation method: five-years MACRS -Marginal income-tax rate = 40% (remains constant over time) -Annual revenue = $144,000 (year-0 constant dollars) -Annual expenses (not including depreciation) = $91,000 (year-0 constant dollars) If the general inflation rate is 4.1% during the project period (which will affect...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT