The paper “ Applied Business Economics” is a cogent variant of the assignment on macro & microeconomics. The author considers two firms, A and B, each with the option to pollute at high or low levels. The table shown is the Payoff Matrix depicting the strategic outcome of the individual companies depending on the actions considered by each other. This matrix is a decision analysis tool that is used, to sum up, the different possible combinations of the actions which these two firms can consider and the respective return or payoff.
In the table above, the two firms A and B have two possible alternatives. They independently, can either adhere to the option of low pollution or can resort to the alternative of polluting high. However, the possible payoffs or the returns for the choice that any company will make are affected by the choice of the other company. B Low Pollution High Pollution A Low Pollution 100 100 -30 120 High Pollution 120 -30 40 40 If Company A, selects the option of polluting less, then the payoff for this choice will either be 100 million dollars when B also resorts to the choice of Low Pollution or, on the contrary, it would be a negative payoff or loss of 30 million dollars if B chooses the option of High Pollution.
Moreover, if A adheres to the option of High Pollution, then there again can be two possible returns depending on the option chosen by B. The return for A will be 120 million dollars if B resorts to Low pollution and returns for A will be 40 million dollars if B also adheres to High Pollution. What is the Nash Equilibrium?
Discuss the implication of this in Free Market, with no government intervention. The given case presents a typical instance strategic interaction of organizations in an economic or socio-economic arena. Thus it can be considered as a strategic game having all the three necessary elements i. e. players, course of action for each player, and the associated payoff for each action (Harsanyi & Reinhard, 1998). Now in order to predict the outcome of such strategic interactions, the concept of Nash equilibrium can be applied which in fact is a fundamental concept in the theory of games (Nash, 1950).
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