Consider the following information for a simultaneous move game: If you advertis

Question

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 answers is correct.

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 answers is correct.

Explanation / Answer

The payoff matrix of this game is as follows:

Your dominant strategy is "Advertise," because whatever is the strategy of your rival, you do better when you advertise. Same is the case with your rival. That is, whatever you do, your rival does better when he/she advertises.

So the Nash equilibrium is (Advertise, Advertise).

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