Answered

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The payoff matrix supplied shows outcomes of various strategies that two firms might follow in response to action on the part of the other company. This payoff matrix describes actions in developing vaccines for not-too-rare but also not-too-common diseases. Each element shows the payoffs to a set of strategies as the payoff to the domestic firm, then a comma, then the payoff to the foreign firm.

Foreign firm
Enter Not Enter
Domestic firm Enter -3,-3 183,0
Not Enter 0,183 0,0

Required:
What is the minimum subsidy the US must offer the domestic firm to ensure that it will choose to produce the vaccine?

Sagot :

Answer:

Subsidy per unit must be equal to 3.

Explanation:

The payoff matrix shows that the Domestic firm can earn -3 or 183 from entering into the market. While, it will get only 0 from not entering. So it will be beneficial for it to enter provided the government can bear the negative payoff it gets from entering as the foreign firm also enters.

Thus, if the government can subsidise the domestic firm's negative payoff of $3 from entering such that its payoff becomes, 0 or 186 from entering and 0 from not entering. Like this the domestic firm will be more likely to enter and produce the vaccine.

Thus, the amount of the subsidy must be $3.

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