Big Earth and District 13 Are Two Producers of Neodymium

Multiple Choice

Big Earth and District 13 are two producers of neodymium, a rare earth. If they agree to restrict output, each firm earns $100 million per year. If both firms expand output, each firm earns $50 million per year. If one firm restricts output and the other firm expands output, the firm that expands output earns $150 million per year and the other firm earns only $30 million per year. Assume that Big Earth and District 13 will compete infinitely, with each firm following a grim trigger strategy. Which of the following statements is TRUE?

A) If d = 0.50, Big Earth is indifferent between agreeing to restrict output and expanding output.
B) If d = 0.40, Big Earth would be better off restricting output.
C) If d = 0.90, Big Earth would be indifferent between agreeing to restrict output and expanding output.
D) If d = 0.75, Big Earth would be better off by expanding output.