Firm A

-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

Question

Firm A
 
-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

Quizplus · Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the other player's strategy. When both A and B conduct R&D, neither firm can unilaterally change its strategy to increase its payoff, assuming the other firm's strategy remains unchanged. This scenario typically results in both firms conducting R&D to not be at a competitive disadvantage, despite the costs, as the benefits (increased sales due to higher product quality) outweigh the costs, leading to higher economic profits.

Firm a -Firms a and B Can Conduct Research and Development (R&D)