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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Definitions:

Sales Dollars

The total amount of revenue generated from the sale of goods or services, expressed in monetary units.

Common Fixed Expenses

Costs that do not change with the level of production or sales and are shared across different segments or products of a business.

Variable Costing

An accounting method that considers only variable costs for product costing, excluding fixed manufacturing overhead.

Unit Product Cost

The total cost to produce one unit of a product, including direct materials, direct labor, and allocated overheads.