There are two existing firms in the market for computer chips, firm A and firm B. Firm A can adopt a new technology that reduces the production costs for the chip and is considering whether to adopt the innovation or not. Adopting the innovation costs C dollars (think of this as a "set-up" cost), but it increases the profits that the firm obtains from the chips (which are produced at a lower cost). However, once the new technology is adopted by firm A, then firm B can adopt it with a smaller set-up cost of C/2 dollars. If firm A does not innovate, then the game ends and each firms earns $5. If firm A decides to adopt the innovation and firm B decides not to adopt it, A earns $20 (minus the cost of the innovation) while B earns $0. If firm A adopts the innovation and firm B adopts it as well, each firm earns $15 minus the cost of the innovation. (Assume that players are rational and seek to maximize their own payoffs.)

A. For what values of C will firm B adopt the innovation if firm A adopts it? Explain.

B. For what values of C will firm A adopt the innovation? What is your prediction in this case? Explain.

C. What is your prediction if C = $15? Explain.