-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.

Question

-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.

Quizplus · Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the other player's strategy. If both firms conducting R&D leads to higher profits for both compared to any unilateral deviation, then both conducting R&D is the Nash equilibrium.

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