Question
2. This question contains some of the important elements of a crucial situation facing many corporations and individuals today: the pressing issue of not dirtying
2. This question contains some of the important elements of a crucial situation facing many corporations and individuals today: the pressing issue of not dirtying the planet. The following information depicts the weekly profits for two firms located near a canal: Firm 1 and Firm 2. The profits of each firm depend on the firms' pollution choices. Each firm's choices affect each other's profit because if one plant pollutes, it affects the other's productivity (through both worker productivity and processing costseach firm uses water from the canal for production and dirty water is costly to clean). If both Firm 1 and Firm 2 decide to pollute, they will each make a profit of 50,000. In contrast, if both opt not to pollute, they will make profits of 70,000 each. If Firm 1 decides to pollute, and Firm 2 does not, Firm 1 will profit from 90,000 while Firm 2 will make 5,000 profit. Lastly, if Firm 1 does not pollute, but Firm 2 decides to pollute, Firm 1 will make a profit of 5,000 while Firm 2 will make a profit of 90,000. a. Present the information given above in a payoff matrix. b. Identify the Nash equilibrium outcome. c. What is the cooperative outcome? d. Briefly discuss the usefulness of game theory analysis in managerial decision making.
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