Question

ppose two firms, Alstom from France, and Bombardier trom Canada, are bidding on a contract to replace train cars for the subway system in Mexico City If they bid the same amount they share the contract otherwise, the low wins. The figure below shows the payoff matrix for this content AllstomA) A bids 530 million 55 million bids $45 million ProtoA 515 Protto 515 Pro A 575m Puli hoà 50 m Bombardier (8) bids 30 million Pro A 50 m Pro 575 PA: 53.75 m Preto 11 5175 m O A Bombardier tid 545 million and as proof wide Alstom bids and prot of 57 5 OB och om bids 545 million and samprot of 15 milion Oceach fumbi 50 on and proto 375 milion OD Bombardier milion and profit of 75 milion White Albino

Answer 1

Question 1) If Bombardier chooses to bid low, Allstom will also choose to bid low.

If Bombardier chooses to bid high, Allstom will also choose to bid low. So, Allstom has a dominant strategy to bid low.

If Allstom chooses to bid low, Bombardier will also choose to bid low.

If Allstom chooses to bid high, Bombardier will also choose to bid low. So, Bombardier has a dominant strategy to bid low.

So, we can conclude that each firm will bid $30 million and earns a profit of $3.75 million.

So, option C is the correct answer.

Question 2)

In the case of prisoner’s dilemma, the firms would like to use their dominant strategies of bidding low. But in prisoner’s dilemma, if both the firms cooperate and choose a strategy of bidding high, then both the firms would end up having higher profits. So, the cooperative outcome in this situation is that both the firms bid $120 million and then they both will get 50% of the bids and both will have a profit of $60 millions.

So, option B is the correct answer.

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