Crude oil is transported across the globe in enormous
tanker ships called Very Large Crude Carriers (VLCCs). By 2001, more than 92%
of all new VLCCs were built in South Korea and Japan. Assume that the price of
new VLCCs (in millions of dollars) is determined by the function P 5 180 2 Q,
is, assume that only Japan and Korea produce VLCCs, so they are a duopoly.)
Assume that the cost of building each ship is $30 million in both Korea and
Japan. That is, 30, where the per-ship cost is measured in
millions of dollars.
(a) Write the profit functions for each country in terms
Find each country’s best-response function.
(b) Using the best-response functions found in part (a),
solve for the Nash equilibrium quantity of VLCCs produced by each country per
year. What is the price of a VLCC? How much profit is made in each country?
(c) Labor costs in Korean shipyards are actually much
lower than in their Japanese counterparts. Assume now that the cost per ship in
Japan is $40 million and that in Korea it is only $20 million. Given cKorea
= 20 and cJapan = 40, what is the market share of each country (that
is, the percentage of ships that each country sells relative to the total
number of ships sold)? What are the profits for each country?