Suppose the market for computer chips is dominated by two firms: Intel and AMD. Intel has discovered how to make superior chips and is considering whether or not to adopt the new technology. Adoption would entail a fixed setup cost of F but would increase revenues. However, if Intel adopts the new technology, AMD can easily copy it at a lower setup cost of F/2. If Intel adopts and AMD does not, Intel would earn $20 in revenues while AMD would earn $0. If Intel adopts and AMD does likewise, each firm will earn $7 in revenues. If Intel does not adopt the new technology, it will earn $3 and AMD will earn $2. Each firm cares only about its own profits. The extensive form representation of the game is shown below. Suppose F = 16. Then, using backward induction, what prediction do we obtain?
A. Intel will not adopt the new technology.
B. Intel will adopt the new technology, and so will AMD.
C. Intel will adopt the new technology, and AMD will not adopt it.
D. All of the above.
Suppose the market for computer chips is dominated by two firms: Intel and AMD. Intel has discovered how to make superior chips and is considering whether or not to adopt the new technology. Adoption would entail a fixed setup cost of F but would increase revenues. However, if Intel adopts the new technology, AMD can easily copy it at a lower setup cost of F/2. If Intel adopts and AMD does not, Intel would earn $20 in revenues while AMD would earn $0. If Intel adopts and AMD does likewise, each firm will earn $7 in revenues. If Intel does not adopt the new technology, it will earn $3 and AMD will earn $2. Each firm cares only about its own profits. The extensive form representation of the game is shown below. Suppose F = 16. Then, using backward induction, what prediction do we obtain? A. Intel will not adopt the new technology. B. Intel will adopt the new technology, and so will AMD. C. Intel will adopt the new technology, and AMD will not adopt it. D. All of the above.
Solution
B. Intel will adopt the new technology, and so will AMD.
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Suppose the market for computer chips is dominated by two firms- Intel.docx
1. Suppose the market for computer chips is dominated by two firms: Intel and AMD. Intel has
discovered how to make superior chips and is considering whether or not to adopt the new
technology. Adoption would entail a fixed setup cost of F but would increase revenues.
However, if Intel adopts the new technology, AMD can easily copy it at a lower setup cost of
F/2. If Intel adopts and AMD does not, Intel would earn $20 in revenues while AMD would earn
$0. If Intel adopts and AMD does likewise, each firm will earn $7 in revenues. If Intel does not
adopt the new technology, it will earn $3 and AMD will earn $2. Each firm cares only about its
own profits. The extensive form representation of the game is shown below. Suppose F = 16.
Then, using backward induction, what prediction do we obtain?
A. Intel will not adopt the new technology.
B. Intel will adopt the new technology, and so will AMD.
C. Intel will adopt the new technology, and AMD will not adopt it.
D. All of the above.
A. Intel will not adopt the new technology.
B. Intel will adopt the new technology, and so will AMD.
C. Intel will adopt the new technology, and AMD will not adopt it.
D. All of the above.
Suppose the market for computer chips is dominated by two firms: Intel and AMD. Intel has
discovered how to make superior chips and is considering whether or not to adopt the new
technology. Adoption would entail a fixed setup cost of F but would increase revenues.
However, if Intel adopts the new technology, AMD can easily copy it at a lower setup cost of
F/2. If Intel adopts and AMD does not, Intel would earn $20 in revenues while AMD would earn
$0. If Intel adopts and AMD does likewise, each firm will earn $7 in revenues. If Intel does not
adopt the new technology, it will earn $3 and AMD will earn $2. Each firm cares only about its
own profits. The extensive form representation of the game is shown below. Suppose F = 16.
Then, using backward induction, what prediction do we obtain? A. Intel will not adopt the new
technology. B. Intel will adopt the new technology, and so will AMD. C. Intel will adopt the new
technology, and AMD will not adopt it. D. All of the above.
Solution
2. B. Intel will adopt the new technology, and so will AMD.
