Suppose Two Firms, Allstom from France, and Bombardier from Canada

question 92

Multiple Choice

Suppose two firms, Allstom from France, and Bombardier from 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 bid wins. The figure below shows the payoff matrix for this contest. $\begin{array}{|l|l|l|}\hline \text { Bombardier (B) }&\text { Allstom (A) }\\\hline &\begin{array}{l}\text { A bids } \\\text { \$50 million }\end{array} & \begin{array}{l}\text { A bids } \\\$ 35 \text { million }\end{array} \\\hline \begin{array}{l}\text { B bids } \\\$ 50 \text { million }\end{array} & \begin{array}{l}\text { Profit to } A: \$ 10 \mathrm{~m} \\\text { Profit to } B: \$ 10 \mathrm{~m}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 5 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 0 \mathrm{~m}\end{array} \\\hline \begin{array}{l}\text { B bids } \\\$ 35 \text { million }\end{array} & \begin{array}{l}\text { Profit to } A: \$ 0 \\\text { Profit to } B: \$ 5 \mathrm{~m}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 2.5 \mathrm{~m} \\\text { Profit to } B: \$ 2.5 \mathrm{~m}\end{array} \\\hline\end{array}$ FIGURE 11- 4
-Refer to Figure 11- 4. What is the Nash equilibrium in this bidding contest between Allstom and Bombardier?

• A) The two firms will co- operate and maximize their joint profits at $10 million each.
• B) Each firm will bid the high price, expecting a larger total profit.
• C) Each firm will bid the low price, and each will earn a profit of $2.5 million.
• D) There is no Nash equilibrium in this bidding contest, because each firm can expect to earn at least $5 million.
• E) both A and C are Nash equilibrium.

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