Question

Suppose that Fizzy Soda and Townie Soda must choose whether to advertise their soft drinks. In a Nash equilibrium, both firms choose to advertise and earn weekly profits of $80,000. Which of the following statements is (are) TRUE?
I. Neither firm has incentive to change its advertising strategy, given the strategy choice of its rival.
II. If Townie Soda decided to stop advertising, its profits would fall below $80,000.
III. If both firms stopped advertising, it is possible that each firm could earn profits greater than $80,000.

	I, II, and III
	II and III
	I
	I and II

Answer 1

Ans is A

Nash equilibrium is a situation where there is no incentive for any player to change their strategy given the strategy of other player.

Thus if nash equilibrium is given then 1st will always follow.

Secondly if one firm deviate and doesnot advertise then definitely he will loose otherwise advertising wouldnot have been a nash equilibrium.

If both stop advertisement then both can save their advertising cost and their market share will remain same. Thus leading to more profit.