d Due Today at 11 PM CST Suppose that Creamland and Dairy King are the only two

Question

d Due Today at 11 PM CST 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 9,9 12, 4 Creamland Doesn't Advertise 4, 12 10, 10 For example, the upper right cell shows that if Creamland advertises and Dairy King doesn't advertise, Creamland will make a profit of $12 milion, and Dairy King will make a profit of $4 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 s million if Dairy King advertises and a profit ofmillion if Dairy King does not advertise. million if Dairy King advertises and a profit of $ million if Dairy King If Creamland decides not to advertise, it will earn a profit of s 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?

Explanation / Answer

$9, $12( see the payoff matrix) $4, $10 Advertises (Best response) Advertise (Best Response choice where he gets higher payoff) Option c, both chooses dominant strategy Advertise Option a, because they will collude to earn higher profit which is under Don’t Advertise

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