Hello, I\'m having a hard time figuring out where to get started with this probl

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Hello, I'm having a hard time figuring out where to get started with this problem.

4. Coase Farm grows soybeans on farmland next to property owned by Taggart Transcontinental Railroad. Taggart can operate zero, one, or two trains per day by Coase Farm, yielding an annual net income of zero, $9 million, or $12 million. Coase Farm can grow soybeans on zero, one or two fields, yielding an annual net income of zero, $15 million, or $18 million less environmental damages inflicted by Taggart's trains of S4 million per train, per field planted, per year. The annual incomes of Taggart and Coase, respectively, as a function of the number of trains that Taggart operates and the number of fields that Coase uses to grow soybeans, are shown below. For example, if Taggart runs one train and Coase plants two fields, Taggart earns income of S9 million, whereas Coase generates $18 million less $4 milon of damages to each field, for a net income of $10 million. Zero trains One traiin Two trains Zero fields $0. $0) 9. SO $12. $0 One field ($0. $15) $9, $11 $12. $7 Two fields ($0. $18) 9. $10 $12. $2 Annual income for (Taggart, Coase) Taggart Transcontinental cannot be held liable for the damages it causes to Coase Farm. It is prohibitively expensive for Taggart Transcontinental and Coase Farm to enter into a contract regarding either party's use of its land a. What operating decisions will Taggart and Coase make if each maximizes its own profits, assuming that each understands the other's payoffs? b. Suppose that Taggart Transcontinental and Coase Farm merge. What operating decisions maximize the profits of the merged firm? How does the income of each division compare to each firm's income before the merger? c. You are the CEO of the merged firm. You are contemplating how to allocate decision rights and measure performance after the merger. Possibilities include, but are not limited to (i) decentralize operating decision rights (TT chooses how many trains to run and CF chooses how many fields to use) and evaluate divisions on divisional income: (ii) decentralize operating decision rights and evaluate on the basis of divisional income, but charge TT for the damages it causes CF, transferring the money to CF: (iii) decentralize operating decision rights but evaluate everyone on the basis of firmwide income (iv) centralize operating decision rights and evaluate divisions relative to a profit budget that reflects the operating decisions you intend to make. What should you do?

Explanation / Answer

A.

So TT always chooses Two trains irrespective of any selection of C.

For C:

So there is no dominant strategy, but selecting one field in most case is profitable, by probability.

But if risk is to be taken then two fields can be chosen.

B

After merger the total profits including the damages is :

So the best strategy after merger is to Have one train and one field.

C.

Option iv) as it takes decision out of the individual divisions giving the best outcome . And there is nothing left to chance.

And the profit is the key criterion for the decision.

Hence (iv)

Zero fields One field Two fields Zero trains 0,0 0,15 0,18 One Train 9,0 9,11 9,10 Two trains 12,0 12,7 12,2 TT/C Zero fields One field Two fields Zero trains 0,0 0,15 0,18 One Train 9,0 9,11 9,10 Two trains 12,0 12,7 12,2 C chooses 0 TT 2 trains TT/C Zero fields One field Two fields Zero trains 0,0 0,15 0,18 One Train 9,0 9,11 9,10 Two trains 12,0 12,7 12,2 C chooses 1 TT 2 trains TT/C Zero fields One field Two fields Zero trains 0,0 0,15 0,18 One Train 9,0 9,11 9,10 Two trains 12,0 12,7 12,2 C chooses 2 TT 2 trains

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