Consider the following sequential game between firm 1 and firm 2. First, firm 1
ID: 1093486 • Letter: C
Question
Consider the following sequential game between firm 1 and firm 2. First, firm 1 decides to adopt either technology A or technology B. Firm 2 observes firm 1's decision and then also decides between technology A or technology B. The profits (in thousands of dollars) of the firms are as follows. If both adopt technology A, then firm 1's payoff is $100 and firm 2's is $40. If firm 1 adopts technology A and firm 2 adopts technology B, then the payoff of each firm is $50. If firm 1 adopts technology B and firm 2 adopts technology A, firm 1's payoff is $60 and firm 2's is $100. Finally, if both adopt technology B, then each firm makes $25 in profits. Using the principle `look ahead and reason back' (i.e., backward induction), the most reasonable prediction is
that both firms will adopt technology A.
that firm 1 will adopt technology A and firm 2 will adopt technology B.
that both firms will adopt technology B.
that firm 1 will adopt technology B and firm 2 will adopt technology A.
A.that both firms will adopt technology A.
B.that firm 1 will adopt technology A and firm 2 will adopt technology B.
C.that both firms will adopt technology B.
D.that firm 1 will adopt technology B and firm 2 will adopt technology A.
Explanation / Answer
C.
that both firms will adopt technology B.