-Firms a and B Can Conduct Research and Development (R&D)

question 115

Multiple Choice

-Firms A and B can conduct research and development (R&D) or not conduct it. R&D is costly but can increase the quality of the product and increase sales. The payoff matrix is the economic profits of the two firms and is given above, where the numbers are millions of dollars. A's best strategy is to

• A) conduct R&D regardless of what B does.
• B) not conduct R&D regardless of what B does.
• C) conduct R&D only if B conducts R&D.
• D) conduct R&D only if B does not conduction R&D.

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Definitions:

Variable

An element, feature, or factor that is liable to vary or change.

Option Vega

A measure of an option's sensitivity to changes in the volatility of the underlying asset, indicating how much the option's price is expected to move per 1% change in volatility.

Standard Deviation

The measure indicating the amount of variation or spread in a set of data points relative to its mean.

Underlying Asset

The financial instrument (such as a stock, bond, commodity, or currency) upon which a derivative's value is based.