Suppose AMD Is Considering Cloning Intel's Latest CPU Chip

question 20

Multiple Choice

Suppose AMD is considering cloning Intel's latest CPU chip. If AMD enters Intel's market, Intel can play Mean, expand its output, drop prices, and try to make AMD's profit as small as possible or play Nice by cutting back its output and sharing the market. AMD and Intel both know that after all moves are complete, the time-discounted profits of future chip production in billions of dollars are Intel
Assuming AMD moves first, which of the following is the Nash equilibrium for sequential play?

• A) (Out, Mean)
• B) (In, Mean)
• C) (Out, Nice)
• D) (In, Nice)

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Definitions:

Capital Budgeting

The whole process of analyzing projects and deciding whether they should be included in the capital budget.

Capital Asset Pricing Model

A model that describes the relationship between systematic risk and expected return for assets, particularly used in the pricing of risky securities.

Expected Return

The weighted average of all possible returns of an investment, considering all risks and the likelihood of each outcome.

Well-diversified Portfolio

An investment portfolio with a mix of assets designed to reduce exposure to risk by spreading investments across various sectors or asset classes.