Final answer:
New Pill's best strategy when Pharm Corp chooses low research spending depends on the game tree's specifics. New Pill should choose a strategy that maximizes its profits, considering factors like competitive advantage and cost maintenance. The decision-making is rooted in game theory, where maximization of payoffs in relation to competitors' actions is key.
Step-by-step explanation:
If Pharm Corp opts for low research spending, New Pill's best option would theoretically depend on the specifics of the game tree, such as the payoff matrix and the strategies available to New Pill. In game theory, firms attempt to maximize their payoffs, which often involves reacting to the strategies of competitors. Without the specific payoff matrix, we can generalize that New Pill should select the strategy that maximizes its profit given Pharm Corp's low spending choice, potentially expending more on research to gain competitive advantage or alternatively cutting costs to maintain profitability.
Considering strategies in the pharmaceutical industry, a firm may consider external factors, such as spillover benefits to society, which often justify higher spending on research. This is described as the difference between the D private and D social curves. However, in the game tree context, the firm's immediate profit maximization might not align with the socially optimal level of research spending. Similarly, when assessing profits in the context of total revenue and total cost, for Health Pill, a monopoly firm, the profit-maximizing level of output is distinct from the revenue-maximizing level, as profits factor in both revenues and costs.