Final answer:
Both firms are likely to increase output leading to a Nash equilibrium,(option D) where each firm's decision to do so is the best response to the other firm's action, securing at least $400 in profits rather than risking a reduction to $200.
Step-by-step explanation:
When analyzing the outcome of a game between two firms in a prisoner's dilemma scenario, it is evident that both firms face a decision to either hold down output or expand it. If we refer to the information provided, we can deduce that both Firm A and Firm B will increase output, and this outcome becomes the Nash equilibrium. This occurs because each firm's decision to expand output is the best response to the other firm's action, whether B holds down output or raises it. Firm A increases output to avoid the lowest payoff of $200 and to attempt gaining a higher payoff of either $400 or $1,500, depending on B's decision. Likewise, Firm B has the same set of incentives. Therefore, the likely outcome is that both firms will price low (increase output), and this outcome represents the Nash equilibrium as each firm is doing the best they can given the strategy of the other firm.