Question

5. To advertise or not to advertise 

Suppose that Expresso and Beantown are the only two firms that sell coffee. The following payoff matrix/table shows the profit in millions of dollars) each company will earn depending on whether or not it advertises: 

For example, the upper right cell shows that if Expresso advertises and Beanton doesn't advertise, Expresso will make a profit of $18 million, and Beantown will make a profit of $2 million. Assume this is a simultaneous game and that Expresso and Beantown are both profit-maximizing firms. 

If Expresso decides to advertise, it will earn a profit of _______  million if Beantown advertises and a profit of _______  million if Beantown does not advertise. 

If Expresso decides not to advertise, it will earn a profit of _______ million if Beantown advertises and a profit of _______  million if Beantown does not advertise.

 If Beantown advertises, Expresso makes a higher profit if it chooses _______ 

 If Beantown doesn't advertise, Expresso makes a higher profit if it chooses _______ 

Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing?  

• Both firms will choose not to advertise. 

• Expresso will choose to advertise and Beantown will choose not to advertise 

• Expresso will choose not to advertise and Beantown will choose to advertise 

• Both firms will choose to advertise. 

Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing? 

• Expresso will choose to advertise and Beantown will choose not to advertise 

• Both firms will choose to advertise. 

• Both firms will choose not to advertise. 

• Expresso will choose not to advertise and Beantown will choose to advertise

Answer 1