Use the following to answer question:
Figure 12.2
-(Figure 12.2) Two firms are considering whether to expand their production capacity. Which of the following statements is TRUE?
A) The outcome is (10 , 6) or (6 , 10).
B) There is no first-mover advantage.
C) Neither firm expands its production capacity.
D) There is a first-mover advantage.

Question

Use the following to answer question:
Figure 12.2 
-(Figure 12.2) Two firms are considering whether to expand their production capacity. Which of the following statements is TRUE?
A) The outcome is (10 , 6) or (6 , 10). 
B) There is no first-mover advantage. 
C) Neither firm expands its production capacity. 
D) There is a first-mover advantage.

Quizplus · Accepted Answer

In the game depicted in Figure 12.2, Firm A has an advantage if it expands capacity first (5,5) vs (4,4). Therefore, there is a first-mover advantage in this game. The equilibrium outcome is for Firm A to expand capacity and Firm B not to expand capacity, resulting in (10,6).

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