HEB, headquartered in San Antonio, TX, has had grocery stores inCorpus Christi, TX for many decades. For many years it has marketeditself as a “low cost” grocery store. Until about 10 years ago, itsheadquarters had been in Corpus Christi. In this local market, HEBhas been successful in keeping out or driving out all other majorregional and national grocery competitors. Walmart first came intoCorpus Christi at least 30 years ago but did not have a “superstore” with a major grocery section until about 20 years ago. Itmarkets itself as proving “always the low cost, always.” HEB openedits first local super store, called “HEB plus,” approximately 15years ago. Thus began the headto-head competition between these twofirms in this small local market. a. Suppose HEB can commit toselling a large quantity of output (through an HEB plus) or a smallquantity of output (an HEB) in the Calallen area of Corpus Christi,on Farm-to-Market Road 624, before Walmart decides whether torebuild its regular Walmart store there, replacing it with aWalmart Super Store. That is, HEB chooses whether to commit to asmall quantity, or a large quantity, and then Walmart decideswhether to rebuild to have a much larger one. Suppose further: IfHEB commits to the small quantity and if Walmart doesn’t rebuild,HEB nets $400,000 in the first year and Walmart nets $250,000 atthe existing store (on Farm-to-Market Road 624). If instead Walmartdoes rebuild a large store on Farm-to-Market Road 624, Walmart nets$825,000 and HEB nets $200,000. If HEB commits to the HEB plus andWal-Mart does not rebuild, HEB nets $1,700,000 and Walmart nets$100,000 at its existing store. If instead Walmart does rebuild,Walmart nets $1,350,000 and HEB nets $550,000.

i. Show the game tree described above, being careful to labelaccurately and completely. (Word has drawing tools; the only oneyou’re likely to need is the arrow. Or you can draw this free-handand send a PDF or a photo) (1 points)

ii. What is HEB’s likely decision? Why? (1 point)

iii. What is Walmart’s likely decision? Why? (1 point)

b. Why is it important for these two firms to know the priceelasticity of demand for the products it sells?