Answer Happy

In a duopoly market, to produce a given amount of output, Firm 1 uses relatively more capital but less labor than does Firm 2. Both firms hire labor from the same labor union, which sets the same wage for both firms. Firm 1 is about to bargain with the union Whatever wage it negotiates, Firm 2 has to pay the same wage. Because this industry is suffering from a downturn in demand, the union is willing to accept the current wage. However, if Firm 1 agrees to a higher wage, its cost of production will rise by less than Firm 2's cost. The game tree shows the profits corresponding to the various actions by the firms. Firm 1's profit is A if it chooses the high wage and Firm 2 chooses the low output level. Under what condition should Firm 1 offer to pay a high wage? Assume for simplicity the game tree is illustrated in the figure to the right Suppose that A = 36 but that profits under the current wage and high output are 42 for Firm 1 and 33 for Firm 2. Which wage would Firm 1 choose? Fimm 1 should choose the wage