Using Game Theory, analyze the following: There are two donut shops in a small t

Question

Using Game Theory, analyze the following: There are two donut shops in a small town, and both are considering advertising campaigns to gain a greater share of the loca Acme Donut currently makes $30,000 per month, $10,000 Beta Donut is the other donut s Donut, increasing its own profit by $5,000 If they both launch advertizing campaigns, then neither will gain any additional revenue, but vwill stillinicur the cost of advertising. What is the dominant Strategy for Beta Donut and how much will they make? but with a $10,000 ad campaign, it can take $20,000 away from its competitor,increasing its own prolt by hop and currently makes $50,000 per month, but with a $15,000 ad campaign, it can take away $20,000 in business from Acme Beta Donut's dominant strategy is to NOT RUN the advertizing campaign and they will eam $50,000 OBeta Donut's dominant strategy is to NOT RUN the advertizing campaign and they will earn $30,000 Beta Donut's dominant strategy is to RUN the advertizing campaign and they will earm $55,000 O Beta Donut's dominant strategy is to RUN the advertizing campaign and they will earn $35,000. Beta Donut's dominant strategy is to RUN the advertizing campaign and they will eam $30,000

Explanation / Answer

According to the question, if Acme donut earn a profit of $10,000 with ad campain of $10,000 taking $20,000 away from the competitor

while if Beta donut earn a profit of $5,000 with ad campain of $15,000 taking $20,000 away from the competitor

The Extensive form of the game is

The dominant strategy for Beta is Not Run advertisement and they will ern 50,000.

Explaination :

If Acme run advertisement it cost him 10,000 for ad campaign which takes away 20,000 from Beta if it does not advertise and benefit Acme of 10,000.

So the payoff is 30,000 - 10,000(cost of ad) + 10,000 (profit) = 30,000 for Acme and 50,000 - 20,000 = 30,000for Beta - It is the siuation when Acme run ad and Beta do not run ad.

Similarly we make the extensive form of the game.

The dominant strategy from the game, For Beta is not to advertise because whatever Acme choose the best strategy for Beta is not to advertise and they will earn $50,000

because for Acme also the dominant strategy is Not Run ad so beta will earn $50,000.

Correct ans is a)

Beta Acme Run advertisement Not Run advertisement Run Advertisement 0, 0 20000, 30000 Not Run advertisement 10000, 40000 30000, 50000

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