Suppose Toyota and Honda must decide whether to make a new style of side-impact airbags standard equipment on all models. Side-impact airbags raise the price of each automobile they produce by $1,000. If both firms make side-impact airbags standard equipment, each company will earn profits of $2 billion. If neither company adopts the side-impact air-bag technology, each company will earn $3 billion. If one company adopts the technology as standard equipment and the other does not, the adopting company will earn a profit of $4 billion and the other company will earn $1 billion. (22)

a. Draw the normal-form game for the above scenario? (6)

b. Find the dominant strategies for each player? (4)

c. Find the Nash Equilibrium/Equilibria, if it exists. (4)

d. Is the Nash equilibrium/equilibria the best outcome for both firms or could they do better in a different outcome? Explain. (4)

e. Assuming that the firms decide not make airbags standard equipment, how could the government incentivize Honda and Toyota to adopt them as standard equipment in their vehicles (besides regulating that side-impact airbags are mandatory)? (4)