Acura and Volvo offer warranties on the automibiles, where wA is the number of years of an Acura warranty and w - V is the number of years of a Volvo waranty. The revenue for Firm i, i = A for Acura and V for Volvo is TRi=27,000wi / wA +wV. The firm's cost of providing warranty is TCi = 2,000wi.

Acura and Volvo both participate in a warranty setting game in which they simultaneosly set warranties.

A) What is each firm's profit function.

B) Suppose Acura and Volvo can set warranties in a year lengths only, with a maximum of five years. Fill in the pay-off matrix with Acura's and Volvo's profits.

C) Determine the Nash Equilibrium warranties.

D) Suppose Acura and Volvo collude in setting their warranties, what warranties do they set.

E) Now, suppose that Acura's costs of offering warranties decreases ( this may be due to efficiency and productivity gains in the quality of the manufactured products which lead to increased longevity in the automobiles) to TCa=1,000wA.

What is the Nash Equilibrium? Explain the effect of this increase in Acura's manufacturing quality on the equilibrium quantities.