Consider an industry with two firms that are simultaneously deciding whether to
ID: 1118948 • Letter: C
Question
Consider an industry with two firms that are simultaneously deciding whether to make costly safety investments such as sprinkler systems in a plant or escape tunnels in a mine. Unlike the fims, potential employees do not know how safe it is to work at each firm only know how risky it is to work in this industry. If only Firm 1 invests, workers do not know that safety has mpro ed at only Firm 1 s plant. Because the government's accident satisics tr he industry all workers No investment Investment realize that it is safer to work in the industry, so both firms pay lower wages. The proft matrix shows how the firms' profts depend on their safety investments Could cheap talk lead both firms to invest in safety? Why or why not? Cheap talk 400 No investment 400 500 Firm 1 A. can help the firms settle on a single equilibrium because the communication can change the payoffs O B. cannot help the firms settle on a single equilibrium because the firms have a dominant strategy O C. can help the firms sette on a single equilibrium because the firms can use the communcation to make Investment 200 450 binding agreements. O D. cannot help the firms settle on a single equilibrium because the communication occurs after the firms have made their investment decisions. E, can help the firms settle on a single equilibrium because the firms have an incentive to be truthful What is the minimum ine that the government could levy on firms that do notinvest in safely that would lead to a Nash equilibrium in which both firms invest? It would be a Nash equilibrium for both firms to invest if the government levied a fine for not investing of at least Enter your response as a whole number) Click to select your answer(s)Explanation / Answer
C is correct.
Cheap talk is a communication between players that does not cost and players can talk freely. It does not affect payoff. Firms can have cheap talk to come to mutually beneficial agreement.
With cheap talk firms Nash equilibrium is not to invest with payoffs of 400 each. To induce them to invest fine should be atleast 200.