Refer to Table 15.2.6.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.The Nash equilibrium occurs when
A)both A and B conduct R&D.
B)only A conducts R&D.
C)only B conducts R&D.
D)neither A nor B conduct R&D.
E)there is no Nash equilibrium.

Question

Quizplus · Accepted Answer

The highest economic profits for both firms occur when they both conduct R&D. If only one of them conducts R&D, the other firm will not be able to compete and will earn lower profits. If neither conduct R&D, their profits will decrease due to the lack of improvement in product quality. Therefore, the Nash equilibrium occurs when both firms conduct R&D.