In a duopoly market, to produce a given amount of output, Firm 1 uses relatively O more capital but less labor than does Firm 2. Both firms hire labor from the same labor union, which sets the same wage for both firms. Firm 1 is about to bargain with the union. Whatever wage it negotiates, Firm 2 High output has to pay the same wage. Because this industry is suffering from a downturn in (24,12) demand, the union is willing to accept the current wage. Firm 2 High wage However, if Firm 1 agrees to a higher wage, its cost of production will rise by less (A, 15) than Firm 2's cost. The game tree shows the profits corresponding to the various Low output actions by the firms. Firm 1's profit is A if it chooses the high wage and Firm 2 Firm 1 chooses the low output level. Under what condition should Firm 1 offer to pay a High output high wage? (42,33) Current wage Assume for simplicity the game tree is illustrated in the figure to the right. Firm 2 Suppose that A =45 but that profits under the current wage and high output are (36,21) 42 for Firm 1 and 33 for Firm 2. Which wage would Firm 1 choose? Low output Firm 1 should choose the wage. high current