There Are Two Firms That Compete Against Each Other and Each

question 42

Multiple Choice

There are two firms that compete against each other and each needs to decide if they will undertake research and development to improve their 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) Only one will do R&D but we cannot say which one.
• B) Both firms will do R&D.
• C) Both firms will not do R&D.
• D) Firm 1 will do R&D and Firm 2 will not.

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