Firm A/Firm B Invest Abstain Invest Abstain 1/1 4/0 0/4 0/0 Firm A/Firm B Invest Invest Abstain 1/1 4 /-6 Abstain -6/4 -6/-6 Firm A/Firm B Invest Invest Abstain 7/7 10/0 0/10 Abstain 0/0

Principles of Economics 2e
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ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter12: Environmental Protection And Negative Externalities
Section: Chapter Questions
Problem 14RQ: What is an externality?
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The “research and development” game is best analyzed as a simultaneous move game, because the parties lack information about each other’s investment decisions. Which game (in the attachment) describes the “research and development game” properly? Remember that investment costs $6, and that this should be reflected, whenever appropriate, in the correct game matrix. (Note: Firm A chooses the row and Firm B chooses the column.)

Firm A/Firm B
Invest
Abstain
Invest
Abstain
1/1
4/0
0/4
0/0
Firm A/Firm B
Invest
Invest
Abstain
1/1
4 /-6
Abstain
-6/4
-6/-6
Firm A/Firm B
Invest
Invest
Abstain
7/7
10/0
0/10
Abstain
0/0
Transcribed Image Text:Firm A/Firm B Invest Abstain Invest Abstain 1/1 4/0 0/4 0/0 Firm A/Firm B Invest Invest Abstain 1/1 4 /-6 Abstain -6/4 -6/-6 Firm A/Firm B Invest Invest Abstain 7/7 10/0 0/10 Abstain 0/0
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