Two firms each have the option of polluting during production or cleaning up their production process such that they don't pollute. In the absence of fines, polluting is cheaper than not polluting. The profit payoffs for each of the choice combinations are shown in the decision matrix in the Figure below.

		Firm B
		Firm B pollutes	Firm B does NOT pollute
Firm A	Firm A pollutes	Firm B earns $75, 000 profit. Firm A earns $75, 000 profit.	Firm B earns $25, 000 profit. Firm A earns $90, 000 profit.
Firm A does NOT pollute	Firm B earns $90,000 profit. Firm A earns $25,000 profit.	Firm B earns $25, 000 profit. Firm A earns $25, 000 profit.

1. What is the dominant strategy (i.e. a Nash equilibrium) for the two firms, in the absence of any fines? Explain briefly.
2. Let us now assume that the government would like to stop pollution by charging a fine if a firm is found polluting. How large does the fine need to be to prevent a firm from polluting? Briefly explain why you chose that amount.