Suppose that two firms are situated next to a lake. It costs each firm $1,500 per period
Question:
Suppose that two firms are situated next to a lake. It costs each firm $1,500 per
period to use filters that avoid polluting the lake. However, each firm must use the
lake's water in production, so it is also costly to have a polluted lake. The cost to
each firm of dealing with water from a polluted lake is $1,000 times the number of
polluting firms. The possible outcomes for one period are illustrated by the payoff
matrix below. The first number of each pair of payoffs is Lago's payoff and the
second is Nessie's payoff. Assume that the firms are able to collude or cooperate
with each other.
a. Assume that both firms know that they are going to play the game
for 10 periods. In the last period (period 10), what is the equilibrium of the
game? Explain your answer.
Expert Answer:
