You Are the Manager of XYZ Inc

Essay

You are the manager of XYZ Inc. and must decide how much output to produce to maximize your firm's profit. XYZ and its rival, ABC Corp., produce a good that consumers view as essentially identical. These two firms make up the entire industry, so the market price for the good depends on the total amount produced by the two firms. A survey reveals that the market price of the product depends on total market output as follows: XYZ and ABC each use labor, materials, and machines to produce output. XYZ purchases labor and materials on an as-needed basis; their machines were purchased three years ago and are being depreciated according to the straight-line method. XYZ's accounting department has provided the following data about its unit production costs: Reports from industry experts suggest that ABC's cost structure is similar to XYZ's cost structure and that technological constraints require each firm to produce either 100 units or 200 units of output.
a. Briefly explain which costs are relevant for your decision, and why.
b. Write this game in normal form.
c. How many units should XYZ produce: 100 units or 200 units?