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The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital.

Firm B Invest Not invest 20 for A 70 for A Invest 20 for B 5 for B Firm A 50 for A 5 for A 70 for B Not invest 50 for B

An industry spy comes to firm B and offers to pay B in exchange for B's certain and enforceable promise to not invest. How much must the spy pay B?

Select one:

a. $0

b. At least $15 million.

c. At least $35 million.

d. At least $50 million.

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Answer #1

Answer : B at least 15 million

let us understand:

looking at matrix:

  • B expects to earn $20 million by investing because B assumes that A will play A's dominant strategy.
  • B earns$5 million by not investing,
  • so will require at least $15 million to agree to this deal.
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