Two factories dump their waste in a river. This has led to the contamination of

Question

Two factories dump their waste in a river. This has led to the contamination of the water which is also used in the production process. The matrix below shows the profits of the two firms based on their respective decisions to dump their waste into the river. Note that each firm's choice affects the other firm's profit. The first number listed in each cell is the payoff to the row player and the second number listed is the payoff to the column player. What is the equilibrium outcome in this case? Firm 2 DumpsDoes not dump 100, 25 30, 30 25, 100 Dumps Firm 1 75, 75 Does not dump

Explanation / Answer

There is a unique nash eqm 30,30.

When firm 1 dumps Firm 2 is better by dumping as 30>25

when firm 1 does not dump, Firm 2 is better by dumping as 100>75

When firm 2 dumps Firm 1 is better by dumping as 30>25

when firm 2 does not dump, Firm 1 is better by dumping as 100>75

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