There Are Two Firms That Compete Against Each Other and Each

question 24

Multiple Choice

There are two firms that compete against each other and each needs to decide if it will undertake research and development to improve its product. The payoffs are as follows:
If Firm 1 does undertake R&D then Firm 2 will earn $25 million if they also do R&D or $50 million if not;
If Firm 1 does not undertake R&D then Firm 2 will earn $2 million if they do R&D or $0 million if not;
If Firm 2 does undertake R&D then Firm 1 will earn $10 million if they also do R&D or $20 million if not;
If Firm 2 does not undertake R&D then Firm 1 will earn $2 million if they do R&D or $0 million if not;
Regarding this game, which of the following is true?

• A) Both firms will not do R&D.
• B) Only one firm will do R&D but we cannot say which one.
• C) Both firms will do R&D.
• D) Firm 1 will do R&D and Firm 2 will not.

---

Definitions:

Classical Conditioning

The process of acquiring knowledge by associating a naturally existing stimulus with one from the environment.

Extinction Procedure

A process in behavioral psychology that involves the gradual diminishment of a conditioned response by ceasing to pair the conditioned stimulus with the unconditioned stimulus.

Classical Conditioning

A pairing process in learning where two stimuli are continuously linked; initially, the response is elicited by the second stimulus but over time, the first stimulus can elicit this response by itself.

Beeping Sound

A type of auditory signal or notification often used by devices to attract attention or indicate an alert.