Question

Before​ entry, the incumbent earns a monopoly profit of ​$20 ​(profits in​ millions). If entry​ occurs, the incumbent and rival each earn the duopoly​ profit, $6. Suppose that the incumbent can induce the government to require all firms to install​pollution-control devices that cost each firm ​$8. Should the incumbent urge the government to require​ pollution-control devices? Why or why​ not?

Assume for simplicity the game tree is illustrated in the figure to the right. All profits are in millions. What is the subgame perfect Nash​ equilibrium?

A. The Nash equilibrium is for the incumbent to require devices and for the rival to enter regardless of whether devices are required.

B. The game does not have a Nash equililbrium.

C. The Nash equilibrium is for the incumbent to not require devices and for the rival to only enter if devices are not required.

D. The Nash equilibrium is for the incumbent to require devices and for the rival to only enter if devices are not required.

E. The Nash equilibrium is for the incumbent to require devices and for the rival to not enter regardless of whether devices are required.

Answer 1

Answer:

Given,

incumbent earns a monopoly profit of ​$20 ​(profits in​ millions).

If entry​ occurs, the incumbent and rival each earn the duopoly​ profit, $6.

cost each firm ​$8.

the incumbent urge the government to require​ pollution-control devices or not is:

the incumbent should not urge the government,because if they use the device with entry then they should have to face negative profit (-1,-1) and in another case, when rival doesn't enter for the duopoly.

subgame perfect Nash​ equilibrium is:

correct option is (c)

C. The Nash Equilibrium is for the incumbent to not require device and for the rival to the only enter if the device is not required.

because both firms getting benefits (3,3).