Question

note that amrit and aideen started by behaving cooperatively. however, once amrit decided to cheat, aideen decided to cheat as well. in other words, aideen's output decisions are based on amrit's actions.

Answer 1

Firm A will increase or decrease output based on their expectations of Firm B's actions. Trust is influenced by potential profits and risks associated with cheating.

Step-by-step explanation:

In this scenario, the two firms, Firm A and Firm B, can trust each other to some extent. If Firm A believes that Firm B will cheat on their agreement and increase output, A will also increase output because the profit of $400 for both firms increasing output is better than a profit of $200 if A keeps output low while B raises output.

However, if Firm A notices that the profits decline substantially due to cheating, Firm A may cheat as well, resulting in Firm B losing 90% of what it gained. This reasoning makes Firm A believe that Firm B is unlikely to risk cheating. If neither firm cheats, Firm A earns $1000, and if both cheat, Firm A loses at least 50% of potential earnings.

Overall, trust between the two firms relies on their expectations of each other's actions and the potential benefits of cooperating or cheating.