Two Firms,A and B,are Faced with a Decision on Making

question 32

Essay

Two firms,A and B,are faced with a decision on making investments in safety.They each currently earn profit of $500 each.A safety investment would cost $100 paid by the firm that makes the investment and would lower both firms' labor costs by $75 per firm.Draw the payoff matrix for this game and determine the Nash equilibrium.Does it make sense for the firms in the industry to ask the government to force them to make the investment? Explain.

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Definitions:

Real GDP

The value of all goods and services produced within a country adjusted for inflation or deflation.

Base Year

A specific year against which economic growth is measured by comparing other years to it in terms of prices, outputs, or employment.

Nominal GDP

Gross Domestic Product measured at current market prices, without adjusting for inflation, reflecting the value of all goods and services produced by a country within a specific period.

GDP Price Index

A measure that reflects changes in the price level of all goods and services included in the Gross Domestic Product, used to calculate real GDP.