Question

5. To advertise or not to advertise Suppose that Creamland and Dairy King are the only two firms that sell ice cream dollars) each company will eam depending on whether or not it advertises: The following payoff matrox shows the profit (in miliors of Dairy King Adverse Doesnt Advertise Advertise 9,9 15, 3 Creamland Doesnt Advertise 3.15 11, 11 For example, the upper nght col shows that e Creamland advertises and Dairy King doesn't advertise, Creamland will make a proit of $15 milion, and Dairy King wil make a proft of $3 milion. Assume this is a simutaneous game and that Creamland and Dary King are both proft- maximizno frms. If Creamland decides to advertise, t will earn a profit ofs milion Dary King advertises and a profit of milion it Dary King does not advertie. If Creamland decides not to advertise, it will earn a profit of milion if Dairy King advertises and a profit of milion Dary King does not advertise. DY Dairy ong advertises, Creamland makes a higher profit t chooses

Answer 1

If Creamland decides to advertise ,it will earn a profit of $9 million if Dairy King advertises and a profit of $15 million if Dairy King does not advertise.

If Creamland decides not to advertise , it will earn a profit of $3 million if Dairy King advertises and a profit of $11 million if Dairy King does not advertise.

If Dairy King advertises , Creamland makes a higher profit if it chooses to advertise.

If Dairy King doesn't advertise. Creamland makes a higher profit if it chooses to advertise.

Suppose that both firms start off not advertising . If the firms act independently ,both firms will end up choose to advertise because advertising is a dominant strategy for both firms , regardless of what other firm does. Hence,option(A) is correct.

Suppose that both firms start off not advertising . If the firms decide to collude , then both firms will choose not to advertise . Because Nash equilibrium here is not a optimal strategy ,so if the firms decide to collude, they can agree not to launch advertising campaigns , this means each firm can increase profit to $11 million . Hence, option(C) is correct.