Question:
In the table below, firm 1 and firm 2 can cooperate to share market profits or compete with each other. The figures in the cells represent the profits in crores of INR. They can either cooperate with each other where they share INR 10 crores equally. Alternatively, they can compete, which lowers the market output to INR 4 crores, which they share equally. If one of the firms competes while the other cooperates, the former obtains INR 10 crore of profit while the other makes zero profit. In equilibrium, firm A and firm B should respectively:Firm 2 Cooperate Compete Firm 1 5, 5 0, 10 Compete 10,0 2, 2
In the table below, firm 1 and firm 2 can cooperate to share market profits or compete with each other. The figures in the cells represent the profits in crores of INR. They can either cooperate with each other where they share INR 10 crores equally. Alternatively, they can compete, which lowers the market output to INR 4 crores, which they share equally. If one of the firms competes while the other cooperates, the former obtains INR 10 crore of profit while the other makes zero profit. In equilibrium, firm A and firm B should respectively:
| Firm 2 | Cooperate | Compete |
| Firm 1 | 5, 5 | 0, 10 |
| Compete | 10,0 | 2, 2 |
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Think about each firm's incentives.
Updated On: Dec 21, 2024
- cooperate and cooperate
- compete and compete
- compete and cooperate
- cooperate and compete
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The Correct Option is B
Solution and Explanation
This is a typical scenario of a Prisoner's Dilemma game in economics, where firms are deciding between cooperation and competition. The dominant strategy for both firms is to compete because each firm can earn a higher profit by competing (INR 10 crores) when the other firm cooperates (earning zero if cooperating while the other competes).
The Nash equilibrium occurs when both firms choose to compete, resulting in each firm earning INR 2 crores. While each firm could benefit by cooperating, they each have an incentive to deviate from cooperation to maximize their individual profits.
Thus, the correct answer is (b) compete and compete.
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