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Should firm b insist on 0 percent defects

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Reference no: EM13880145

Firm S supplies inputs to firm B. Because producing the input is quite complicated, some defects are inevitable. Firm S can reduce the rate of defects at a cost. In turn, defective parts lower firm B's profits (because of lost sales and unhappy customers). The firms' profits and costs (in thousands of dollars) are shown in the table.

a. Should firm B insist on 0 percent defects? Why or why not?

b. What level of product quality is part of an efficient agreement? Explain.

 

 

0% Defects

 

B's Profit

100

 

S's Cost

80

 

 

6% Defects

 

B's Profit

50

 

S's Cost

25

2% Defects

86

58

8% Defects

26

20

4% Defects

72

37

10% Defects

24

16

Reference no: EM13880145

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