There are two existing firms in the market for computer chips.Firm A knows how to reduce the production costs for the chip and is considering whether to adopt the innovation or not.Innovation incurs a fixed setup cost of C,while increasing the revenue.However,once the new technology is adopted,another firm,B,can adopt it with a smaller setup cost of C/2.If A innovates and B does not,A earns $20 in revenue while B earns $0.If A innovates and B does likewise,both firms earn $15 in revenue.If neither firm innovates,both earn $5.If C = 15,which is the perfect equilibrium of the game?
A) A innovates, B does not.
B) A innovates, B innovates.
C) Neither firm innovates.
D) None of the preceding answers is correct.

Question

Quizplus · Accepted Answer

If neither firm innovates, both earn $5, which is higher than the net revenue after costs if they both innovate ($15 - $15 = $0) or if only A innovates ($20 - $15 = $5). Therefore, neither firm innovating is the equilibrium.

There Are Two Existing Firms in the Market for Computer