whether to make costly safety investments such as sprinkler systems in a plant or escape tunnels in a mine. Unlike the firms, potential employees do not know how safe it is to work at each firm. Firm 2 Employees only know how risky it is to work in this industry. If only Firm 1 invests, workers do not know that safety has improved at only Firm 1's plant. Because the government's accident statistics for the industry fall, workers realize that it is safer to work in the industry, so both firms pay lower wages. No investment Investment 600 300 No investment The profit matrix shows how the firms' profits depend on their safety investments. 600 750 Firm 1 Could cheap talk lead both firms to invest in safety? Why or why not? 750 675 Cheap talk Investment A. cannot help the firms settle on a single equilibrium because the firms have a dominant strategy. 300 675 B. can help the firms settle on a single equilibrium because the firms can use the communcation to make binding agreements. O C. can help the firms settle on a single equilibrium because the communication can change the payoffs. D. cannot help the firms settle on a single equilibrium because the communication occurs after the firms have made their investment decisions. O E. can help the firms settle on a single equilibrium because the firms have an incentive to be truthful. What is the minimum fine that the government could levy on firms that do not invest in safety that would lead to a Nash equilibrium in which both firms invest? It would be a Nash equilibrium for both firms to invest if the government levied a fine for not investing of at least $. (Enter your response as a whole number.) ...
whether to make costly safety investments such as sprinkler systems in a plant or escape tunnels in a mine. Unlike the firms, potential employees do not know how safe it is to work at each firm. Firm 2 Employees only know how risky it is to work in this industry. If only Firm 1 invests, workers do not know that safety has improved at only Firm 1's plant. Because the government's accident statistics for the industry fall, workers realize that it is safer to work in the industry, so both firms pay lower wages. No investment Investment 600 300 No investment The profit matrix shows how the firms' profits depend on their safety investments. 600 750 Firm 1 Could cheap talk lead both firms to invest in safety? Why or why not? 750 675 Cheap talk Investment A. cannot help the firms settle on a single equilibrium because the firms have a dominant strategy. 300 675 B. can help the firms settle on a single equilibrium because the firms can use the communcation to make binding agreements. O C. can help the firms settle on a single equilibrium because the communication can change the payoffs. D. cannot help the firms settle on a single equilibrium because the communication occurs after the firms have made their investment decisions. O E. can help the firms settle on a single equilibrium because the firms have an incentive to be truthful. What is the minimum fine that the government could levy on firms that do not invest in safety that would lead to a Nash equilibrium in which both firms invest? It would be a Nash equilibrium for both firms to invest if the government levied a fine for not investing of at least $. (Enter your response as a whole number.) ...
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.7P
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Question
Transcribed Image Text:Consider an industry with two firms that are simultaneously deciding
whether to make costly safety investments such as sprinkler systems in
a plant or escape tunnels in a mine. Unlike the firms, potential
employees do not know how safe it is to work at each firm.
Firm 2
Employees only know how risky it is to work in this industry. If only Firm
1 invests, workers do not know that safety has improved at only Firm 1's
plant. Because the government's accident statistics for the industry fall,
workers realize that it is safer to work in the industry, so both firms pay
lower wages.
No investment
Investment
600
300
No investment
The profit matrix shows how the firms' profits depend on their safety
investments.
600
750
Firm 1
Could cheap talk lead both firms to invest in safety? Why or why not?
750
675
Cheap talk
Investment
300
675
A. cannot help the firms settle on a single equilibrium because the
firms have a dominant strategy.
B. can help the firms settle on a single equilibrium because the
firms can use the communcation to make binding agreements.
O C. can help the firms settle on a single equilibrium because the
communication can change the payoffs.
D. cannot help the firms settle on a single equilibrium because the
communication occurs after the firms have made their
investment decisions.
O E. can help the firms settle on a single equilibrium because the
firms have an incentive to be truthful.
What is the minimum fine that the government could levy on firms that
do not invest in safety that would lead to a Nash equilibrium in which
both firms invest?
It would be a Nash equilibrium for both firms to invest if the government
levied a fine for not investing of at least $. (Enter your response as
a whole number.)
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