Firms A and B are contemplating whether or not to invest in R&D. Each has two options: “Invest” and “Abstain.” A firm that invests will invent product X with a probability of 0.5, whereas a firm that abstains is incapable of invention. Investment costs $6. If a firm doesn’t invent X, it makes $0 in revenue. If a firm invests and is the only one to invent X, it becomes a monopolist and generates $20 in revenue. If both firms invent X, each firm becomes a duopolist, and generates $8 in revenue. Revenues are gross figures (i.e. they are not net of investment costs), and there are no costs besides investments costs (i.e. no variable cost of production etc.). The firms are risk-neutral entities, and are uninformed of each other’s investment decisions. What is Firm A’s expected gross revenue (i.e., not net of investment costs) from investing, assuming Firm B invests (i.e. conditional on Firm B investing)? A) -$1B) $2C) $7D) $8E) None of the above

Question

Firms A and B are contemplating whether or not to invest in R&D. Each has two options: “Invest” and “Abstain.” A firm that invests will invent product X with a probability of 0.5, whereas a firm that abstains is incapable of invention. Investment costs $6. If a firm doesn’t invent X, it makes $0 in revenue. If a firm invests and is the only one to invent X, it becomes a monopolist and generates $20 in revenue. If both firms invent X, each firm becomes a duopolist, and generates $8 in revenue. Revenues are gross figures (i.e. they are not net of investment costs), and there are no costs besides investments costs (i.e. no variable cost of production etc.). The firms are risk-neutral entities, and are uninformed of each other’s investment decisions.

What is Firm A’s expected gross revenue (i.e., not net of investment costs) from investing, assuming Firm B invests (i.e. conditional on Firm B investing)?

A) -$1
B) $2
C) $7
D) $8
E) None of the above

Expert Answer

1 Rating

Want to see the step-by-step answer?

Check out a sample Q&A here.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Related Economics Q&A

Find answers to questions asked by student like you

Q: 1. The largest expenditure category of GDP is investment spending. Group of answer choices True Fals...

A: Investment spending: It refers to the amount of investment that is made on the purchase of capita go...

Q: how do i find the change in the wage rate when im not given a wage but have: sales revenue = 80 paym...

A: Payment to labor is simply means the wage rate. In other words, wage is the remuneration received by...

Q: At zero economic profits, a competitive firm:     is making a normal profit; its revenues are ...

A: At zero economic profit, a competitive firm is making a normal profit; its revenues are just suffici...

Q: The following diagram shows supply and demand in the market for tablets. Use the black point (plu...

A: Consumer Surplus: It refers to the difference between the maximum price the buyer is willing to pay ...

Q: The managers of Roosevelt's (a local upscale bar) are considering charging an admission fee on Thurs...

A: 1) Using just the beverage charge per unit:

Q: When supply and demand are equally elastic:     producers carry the majority of the tax burden...

A: When supply and demand elasticities are same, the tax burden borne by both buyers and sellers are eq...

Q: A. Which expenditure category do each of the following items count in?  Group of answer choices - (c...

A: A. To categories the given expendituresYou spend your tax refund on a new car built in America?     ...

Q: FOR each of the following events describe in words what happens to the suply, demand, quantity suppl...

A: Since we only answer up to 3 sub-parts, we’ll answer the first 3. Please resubmit the question and s...

Q: 8. Suppose the government borrow $20 billion more next year than this year. Use a supply-and demand...

A: If the government borrow $20 billion more next year than this year it means government is running a ...