Final answer:
The outcome of the second game depends on the firms' assessment of risk and trust. It is likely that Firm A and Firm B will collude, with Firm A earning $1000, as the risk of cheating outweighs the minimal potential gains.
Step-by-step explanation:
When each firm in the second game bases its decision entirely on the payouts facing the firms in the second game, the strategy choices will depend on their assessment of whether the other party is likely to cheat and the comparative gains or losses from cheating versus cooperating.
Firm A will consider that Firm B is unlikely to risk cheating given the substantial loss (90% of what it gained) if caught. Therefore, it's likely that Firm A will not cheat to chase a small gain ($50) when it can earn a guaranteed $1000 by colluding. Conversely, if Firm A suspects Firm B will cheat, it may also increase output.
The outcome likely depends on the level of trust between the two firms. If either firm believes the other will cheat on the agreement, they may both end up cheating to avoid being at a disadvantage, resulting in lower profits for both. However, due to the reasoning presented and the risk of substantial losses versus the potential for small gains, it is likely that both firms will collude, resulting in Firm A earning $1000 without cheating.