Question

in 30 mins asap please

Question Completion Status: Consider that two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their costs, and thus increase their profits, if they reduced their advertising budgets. But for the plan to work each firm must agree to refrain from advertising Each firm believes that advertising works by increasing the demand for the firm s product, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. Listed in the table below are the individual profits for each firm. Firm A Breaks the agreement Maintains the agreement and and advertises does not advertise Firm B Breaks the agreement Firm A profit = $9,000 Firm B profit - $6,000 and advertises Firm A profit - $10,000 Firm B profit = $4,500 Firm A profit = $11,500 Firm B profit = $2,500 Maintains the agreement and does not advertise Firm A profit = $9,500 Firm B profit = $4,000 At the Nash equilibrium how much profit will Firm A earn? $9,000 because firm Awill maintain the agreement not to advertise, but firm B will break the agreement and choose to advertise. $9,500 because each firm will maintain the agreement and choose not to advertise. $11,500 because firm will maintain the agreement not to advertise, but firmA will break the agreement and choose to advertise $10.000 because each firm will break the areement and choose to advertise O MacBook Air

Answer 1

Ans.- (D)

Nash equilibrium in this game is both firms choose to break agreement and advertise. At this strategy, no firm has any incentive to switch to other strategy and hence its a Nash equilibrium. Payoff of firm A and firm B is 10000 and 4500 respectively at this Nash equilibrium.