Question

In a simultaneous move game: If you advertise and your rival advertises, you each will earn $3 million in profits. If neither of you advertise, you will each earn $7 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $10 million and the non advertising firm will earn $1 million. If this game exists one year, the Nash equilibrium is for your firm

And your rival to advertise

And your rival not to advertise

To advertise and your rival not to advertise

Not to advertise and your rival to advertise

Answer 1

Correct option is (1).

Payoff matrix is as follows (values in $ Million).

		RIVAL
		Advertise	Don't Advertise
ME	Advertise	(3, 3)	(10, 1)
	Don't Advertise	(1, 10)	(7, 7)

If Rival Advertises, my best strategy is to Advertise since payoff is higher (3 > 1).

If Rival Doesn't Advertise, my best strategy is to Don't Advertise since payoff is higher (10 > 7).

If I Advertise, Rival's best strategy is to Advertise since payoff is higher (3 > 1).

If I Don't Advertise, Rival's best strategy is to Advertise since payoff is higher (10 > 7).

Nash equilibrium is: (Advertise, Advertise) [see below].