There are two existing firms in the market for computer chips. Firm A knows how to reduce the production costs for the chip and is considering whether to adopt the innovation or not. Innovation incurs a fixed setup cost of C, while increasing the revenue. However, once the new technology is adopted, another firm, B, can adopt it with a smaller setup cost of C/2. If A innovates and B does not, A earns $20 in revenue while B earns $0. If A innovates and B does likewise, both firms earn $15 in revenue. If neither firm innovates, both earn $5. If C = 15, which is the perfect equilibrium of the game?

A. A innovates, B innovates.
B. Neither firm innovates.
C. A innovates, B does not.
D. None of the answers is correct.


Answer: B

Economics

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