3. To advertise or not to advertise Suppose that Creamland and Dairy King are th
ID: 1110681 • Letter: 3
Question
3. To advertise or not to advertise Suppose that Creamland and Dairy King are the only two firms that sell ice cream. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises Dairy King Advertise Doesn't Advertise Advertise Doesn't Advertise 8, 8 2,15 15, 2 For example, the upper right cell shows that if Creamland advertises and Dairy King doesn't advertise, Creamland will make a profit of $15 million, and Dairy King will make a profit of $2 million. Assume this is a simultaneous game and that Creamland and Dairy King are both profit- maximizing firms. If Creamland decides to advertise, it will earn a profit ofmillion if Dairy King advertises and a profit of s million if Dairy King does not advertise If Creamland decides not to advertise, it will earn a profit ofmillion if Dairy King advertises and a profit of million if Dairy King does not advertise. If Dairy King advertises, Creamland makes a higher profit if it chooses If Dairy King doesn't advertise, Creamland makes a higher profit if it chooses Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing? Both firms will choose to advertise Both firms will choose not to advertise. Creamland will choose not to advertise and Dairy King will choose to advertise Creamland will choose to advertise and Dairy King will choose not to advertise. Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing? Creamland will choose to advertise and Dairy King will choose not to advertise. Creamland will choose not to advertise and Dairy King will choose to advertise Both firms will choose to advertise. Both firms will choose not to advertise.Explanation / Answer
Answer:- If Creamland decides to advertise, it will earn a profit of $8…….. million if Dairy King advertises and a profit of …$15…..million if Dairy King does not advertise.
Reason:- If both Creamland and Dairy King decide to advertise, each firm will earn a profit of $8 million. This outcome is represented by the upper left cell of the payoff matrix. If Creamland decides to advertise and Dairy King decides not to advertise, Creamland will earn a profit of $15 million (and Dairy King will earn a profit of $2 million). This outcome is represented by the upper right cell of the payoff matrix
Answer:- If Creamland decides not to advertise, it will earn a profit of ……$2…….million if Dairy King advertises and a profit of …$11……….million if Dairy King does not advertise.
Reason:- If Creamland decides not to advertise and Dairy King decides to advertise, Creamland will earn a profit of $2 million (and Dairy King will earn a profit of $15 million). This outcome is represented by the lower left cell of the payoff matrix. If both Creamland and Dairy King decide not to advertise, each firm will earn a profit of $11 million. This outcome is represented by the lower right cell of the payoff matrix.
Answer:- If Dairy King advertises, Creamland makes a higher profit if it chooses to advertise
Answer:- If Dairy King doesn't advertise, Creamland makes a higher profit if it chooses to advertise
Answer:- Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing?
Correct option:- Both firms will choose to advertise
Answer:- Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing?
Correct option:- Both firms will choose not to advertise
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