Firm S supplies inputs to firm B. Because producing the input is quite complicated, some defects are inevitable. Firm S can reduce the rate of defects at a cost. In turn, defective parts lower firm B's profits (because of lost sales and unhappy customers). The firms' profits and costs (in thousands of dollars) are shown in the table.

a. Should firm B insist on 0 percent defects? Why or why not?

b. What level of product quality is part of an efficient agreement? Explain. B's Profit S's Cost B's Profit S's Cost 0% Defects 2% Defects 100 80 6% Defects 50 25 86 58 8% Defects 26 20 4% Defects 72 37 10% Defects 24 16