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 advertise, 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 neither firm to advertise

B. None of the statements associated with this question are correct

C. For each firm to advertise

D. For your firm to advertise and the other not to advertise

Answer 1

Answer : The answer is option C.

Based on given information the payoff matrix box become as follows :

Rival

Advertise    Not Advertise

You Advertise (5, 5) (15, 1)

You Not Advertise (1, 15) (10, 10)

Here the game is a simultaneous game. Both firms gets higher profit by choosing Advertise strategy based on above payoff matrix box. Hence both firms will choose the strategy Advertise simultaneously. As a result, the Nash equilibrium is (5, 5). So, at Nash equilibrium both firms advertise.

Hence except option C other options are not correct. Therefore, option C is the correct answer.