5. To advertise or not to advertise Suppose that Creamland and Dairy King are th

Question

5. 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 15, 3 11, 11 9,9 Creamland Doesn't Advertise 3,15 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 $3 million. Assume this is a simultaneous game and that Creamland and Dairy King are both profit- maximizing firms If Creamland decides to advertise, it will earn a profit of$ a profit of $ million if Dairy King advertises and million if Dairy King does not advertise If Creamland decides not to advertise, it will earn a profit of $ and a profit of$ million if Dairy King advertises 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? Cream!and will choose to advertise and Dairy King will choose not to advertise o Creamland will choose not to advertise and Dairy King will choose to advertise o Both firms will choose not to advertise o Both firms will choose to advertise Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing? o Both firms will choose not to advertise o Creamland will choose not to advertise and Dairy King will choose to advertise o Both firms will choose to advertise o Creamland will choose to advertise and Dairy King will choose not to advertise

Explanation / Answer

1) $ 9 million

2) $ 15 million

3) $ 3 million

4) $ 11 million

5) to Advertise

6) to Advertise

7) Both firms will choose to advertise.

This is because both Creamland and Dairy King earns higher profit when they choose to advertise.

8) Both firms will choose not to advertise.

This is because it increases their payoff to $ 11 million each otherwise they earns lower profit.

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