Answer to Question #145605 in Economics for Tony Hu

Question

The value created by the collaboration between firms M and R is given by V = √eM + √eR, where eM andeR are the firms’ respective investments, in dollars. After the investments levels have been chosen, M and R divideV equally. (a)Determine the Nash equilibrium investment levels, and the consequent payoffs for each firm. (b)Suppose that M and R merge. Determine the optimal investment levels and the payoff for the merged firm. Do the firms benefit f rom the merger? Why, or why not?

Answer 1

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