Question

In: Economics

Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their...

Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits of the two home-improvement stores are shown in the table below.


      
Lopes

      
Increase the size of store
and parking lot

Do not increase the size of
store and parking lot

HomeMax

Increase the size
of store and
parking lot

Lopes = $1.0 million
HomeMax = $1.5 million

Lopes = $0.4 million
HomeMax = $3.4 million

Do not increase
the size of store
and parking lot

Lopes = $3.2 million
HomeMax = $0.6 million

Lopes = $2.0 million
HomeMax = $2.5 million


Refer to Table 17-13. Pursuing its own best interest, HomeMax will
    a.   increase the size of its store and parking lot only if Lopes also increases the size of its store and parking lot.
   b.   increase the size of its store and parking lot only if Lopes does not increase the size of its store and parking lot.
   c.   increase the size of its store and parking lot regardless of the decision made by Lopes.
   d.   not increase the size of its store and parking lot regardless of the decision made by Lopes.

Solutions

Expert Solution

c.   increase the size of its store and parking lot regardless of the decision made by Lopes.

Explanation:

HomeMax: Increase the size of store and parking lot

 HomeMax: Do not increase the size of store and parking lot
Lopes: Increase the size of store and parking lot Lopes = $1.0 million
HomeMax = $1.5 million		 Lopes = $3.2 million
HomeMax = $0.6 million
Lopes: Do not increase the size of store and parking lot Lopes = $0.4 million
HomeMax = $3.4 million		 Lopes = $2.0 million
HomeMax = $2.5 million

Given that Lopes Increase the size of store and parking lot, HomeMax's best response is Increase the size of store and parking lot(1.5 million).
Given that Lopes Do not increase the size of store and parking lot, HomeMax's best response is Increase the size of store and parking lot(3.4 million).
So, HomeMax always Increase the size of store and parking lot irrespective of decision of Lopes.

Rahul Sunny answered 2 years ago
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