Exhibit 1 Prices and Projected Annual Sales Volumes for Sony PlayStation 3 and Microsoft Xbox 360 Elite PS3 Price Xbox 360 Price P53 Xbox 360 Projected Number of Projected Number of Units Sold (millions) Units Sold (millions) $299 $299 11.25 11.5 $299 $399 11.75 7.0 $399 $299 8.25 12.5 $399 $399 8.75 8.0Exhibit 2 Sony PlayStation 3 Production Costs per Unit (US dollars) Units Produced 8.25 (in millions) 8.75 9.25 9.75 10.25 10.75 11.25 11.75 12.25 12.75 Production Labor 98 80 67 55 45 38 32 28 26 28 Materials & Parts 168 161 155 145 143 141 140 140 141 142 Overhead 66.67 62.86 59.46 56.41 53.66 51.16 48.89 46.81 44.90 43.14 Distribution 40 40 40 40 40 40 40 30 30 30 Per Unit Total Cost $372.67 $343.86 $321.46 $296.41 $281.66 $270.16 $260.89 $244.81 $241.90 $243.14 Exhibit 3 Microsoft Xbox 360 Elite Production Costs per Unit (US dollars) Units Produced 7.00 (in millions) 7.50 8.00 8.50 9.00 9.50 10.00 10.50 11.00 11.50 12.00 12.50 Production Labor 78 69 62 56 52 48 46 45 44 44 44 44 Materials & Parts 180 172 167 161 156 153 149 147 146 145 144 144 Overhead 64.29 60.00 56.25 52.94 50.00 47.37 45.00 42.86 40.91 39.13 37.50 36.00 Distribution 50 50 50 40 40 40 40 40 40 30 30 30 Per Unit Total Cost $372.29 $351.00 $335.25 $309.94 $298.00 $288.37 $280.00 $274.86 $270.91 $258.13 $255.50 $254.00Refer to the case "Pricing Games: Sony PlayStation and Microsoft Xbox" on the CANVAS course webpage. (a) Use the information in Exhibits 1, 2, and 3 to construct the short-run payoff matrix: Microsoft $399 $299 $399 Sony $299 In your construction, fixed costs should not be included because the problem is concerned with short-run decision-making. In other words, only variable costs are relevant. (b) Based on (a), predict whether Sony and/ or Microsoft will want to reduce console prices by $100? Explain. Use a 2-by-2 one-shot simultaneous game to analyze the situation. You can assume that Nintendo has no plans to change its price. (c) Assume that demand curves are all linear. Calculate the arc own-price elasticities of demand at prices of $299 and $399 for both Sony and Microsoft. Are the demands elastic or inelastic? Are your answers consistent with the economic theory of profit maximization for firms with market power? Explain. (d) Can you think of reasons why these firms would be particularly aggressive in pricing their consoles? Explain