Homework Clinic
Social Science Clinic => Economics => Microeconomics => Topic started by: tfester on Jun 18, 2019
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Two firms, A and B, are faced with a decision on making investments in safety. They each currently earn profit of $500. A safety investment would cost $100 paid by the firm that makes the investment and would lower both firms' labor costs by $75 per firm. If both firms share the investment ($50 each) their labor costs are lowered by $100 per firm. Draw the payoff matrix for this game and determine the Nash equilibrium. Does it make sense for the firms in the industry to ask the government to force them to make the investment? Explain.
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For both firms, the dominant strategy is to not make the investment. The Nash equilibrium occurs when neither firm makes the investment. Government enforcement is preferred because each firm will increase its profit to $550. What each firm needs is not to be forced to make the investment, but the assurance that other firms in the industry are also making the investment.
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Thank you!
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Always glad to help...