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. 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. The profit matrix shows how the firms' profits depend on their safety investments. Could cheap talk lead both firms to invest in safety? Why or why not? Cheap talk A. cannot help the firms settle on a single equilibrium because the firms have a dominant strategy. No investment Firm 1 Investment No investment 600 300 600 Firm 2 750 Investment 750 675 300 675

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. 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. The profit matrix shows how the firms' profits depend on their safety investments. Could cheap talk lead both firms to invest in safety? Why or why not? Cheap talk A. cannot help the firms settle on a single equilibrium because the firms have a dominant strategy. No investment Firm 1 Investment No investment 600 300 600 Firm 2 750 Investment 750 675 300 675

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.7P

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