Table 17-26 Two prescription drug manufacturers (Firm A and Firm B) are faced wi
ID: 1107511 • Letter: T
Question
Table 17-26
Two prescription drug manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare related expenses associated with side-effects from its drugs. Each drug manufacturer has evidence that indicates that taking its prescription drug causes liver failure. State prosecutors do not have access to the same data used by drug manufacturers and thus will have difficulty recovering full costs without the help of at least one of the drug manufacturer's studies. Each firm has been presented with an opportunity to lower its liability in the suit if it cooperates with attorneys representing the states.
Firm B
Concede that taking the drug causes liver failure
Argue that there is no evidence that taking the drug causes liver failure
Concede that taking the drug causes liver failure
Firm A profit = $-60m
Firm B profit = $-40m
Firm A profit = $-100m
Firm B profit = $-12m
Argue that there is no evidence that taking the drug causes liver failure
Firm A profit = $-12m
Firm B profit = $-100m
Firm A profit = $-24m
Firm B profit = $-24m
Refer to Table 17-26. If both firms follow a dominant strategy, Firm B's profits (losses) will be
a. $-100m
b. $-40m
c. $-24m
d. $-12m
Firm B
Concede that taking the drug causes liver failure
Argue that there is no evidence that taking the drug causes liver failure
Firm A
Concede that taking the drug causes liver failure
Firm A profit = $-60m
Firm B profit = $-40m
Firm A profit = $-100m
Firm B profit = $-12m
Argue that there is no evidence that taking the drug causes liver failure
Firm A profit = $-12m
Firm B profit = $-100m
Firm A profit = $-24m
Firm B profit = $-24m
Explanation / Answer
Firm B's dominant strategy is to Argue that there is no evidence that taking the drug causes liver failure because his profits (or losses are always lower) are always higher under this strategy compared to the other strategy irrespective of what firm A chooses.
Firm A's dominant strategy is to Argue that there is no evidence that taking the drug causes liver failure because his profits are always higher (or losses are always lower) under this strategy compared to the other strategy irrespective of what firm B chooses.
If both firm choose their dominant strategy, then losses of firm B is $24 million
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