Assume that an Indian firm is contacted by a multinational car company to produce brake systems. This requires an initial specific investment of I from the Indian subcontractor and a variable cost c per braking system. The car company plans to buy n braking systems from the subcontractor at price p per braking system.

a. Looking from now, at what price, p = p ₀ , the Indian subcontractor would break even?

b. Once the specific investment is made, at what price, p ₁ , that the Indian subcontractor will be willing to produce the braking systems?

c. Which price is higher, p ₀ or p ₁ ? What is their difference?

d. Understanding this potential situation, will the Indian subcontractor make the initial investment?