Answer to Question #255402 in Microeconomics for Lee3415

Question

Question 3 Nimbus and Cleansweep are the only producers of brooms in South Africa. Each firm has two strategies: spend R30 000 a year on research and development (R&D) or spend nothing on R&D. If neither firm spends on R&D, Nimbus' economic profit is R80 000 and Cleansweep's economic profit is R40 000. If both firms perform R&D, Nimbus' economic profit is R50 000 and Cleansweep's economic profit is R10 000. If Nimbus performs R&D and Cleansweep does not, Nimbus makes an economic profit of R120 000 while Cleansweep incurs an economic loss of R20 000. If Cleansweep performs R&D and Nimbus does not, Cleansweep makes a profit of R60 000 while Nimbus loses R10 000. 3.1 Construct a payoff matrix for the game that Nimbus and Cleansweep must play. [6] 3.2 Find the Nash equilibrium. In the Nash equilibrium, what is each firm’s economic profit? [2] 3.3 Would these firms make more economic profit if they collude? Explain. [2]

Answer 1

A)If Nimbus and Cleansweep don't spend on advertisements then the profit is R80000 AND R40000 respectively, thus this is a Nash Equilibrium.

If Nimbus spends on advertisements it increases its profits from R50000 to R120000, and Cleansweep doesn't spend on advertisements its profit drops from R10000 to a loss of R120000 thus there is no Nash Equilibrium.

If Cleansweep spends on advertisements its profit increases from R10000 to R60000, and Nimbus profit drops from R50000 to a loss of R10000, thus this is not a Nash Equilibrium.

if both firms spend on advertisements the profit of Nimbus is R50000 and Cleansweeps make a profit of R10000 thus this is not Nash Equilibrium in the Nash Equilibrium Nimbus economic profit is R50000, and Cleansweep economic profit is R10000.

B) If the two firms collude together they would make more profit, but in such a situation it would be best if Nimbus acquired or bought Cleansweep company and act as a monopoly.