1. Consider the following information for a simultaneous move game: If you adver

Question

1. Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is:

A. for each firm to advertise.

B. for neither firm to advertise.

C. for your firm to advertise and the other not to advertise.

D. None of the preceding answers is correct

Explanation / Answer

A. for each firm to advertise.

Explanation:

Looking at the row for "A advertises":

B advertises = 5, 5
B does not advertise = 15, 1

It appears that "A and B" could be a Nash Equilibrium.

Check row "B advertises":

A advertises = 5, 5
A does not advertise = 1, 15

A has no potential gain by not advertising.

Now looking at the row for "A does not advertise":

B advertises = 1, 15
B does not advertise = 10, 10

There is no gain for B to not advertise, so let "B advertises":

A advertises = 5, 5
A does not advertise = 1, 15

Same situation as before, A will advertise.

Thus "both A and B advertise" is the only nash equilibrium.

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