Table 17-28
Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's product, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:
Firm A
Breaks agreement Maintains agreement
and advertises and does not advertise
-Refer to Table 17-28. What is the outcome of this game?
A)Firm A will advertise but Firm B will not.
B)Firm A will not advertise but Firm B will.
C)Neither Firm A nor Firm B will advertise.
D)Both Firm A and Firm B will advertise.

Question

Table 17-28
Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's product, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:
Firm A
Breaks agreement Maintains agreement
and advertises and does not advertise 
-Refer to Table 17-28. What is the outcome of this game?
A)Firm A will advertise but Firm B will not. 
B)Firm A will not advertise but Firm B will. 
C)Neither Firm A nor Firm B will advertise. 
D)Both Firm A and Firm B will advertise.

Quizplus · Accepted Answer

In a typical game theory scenario like this, both firms will choose to advertise because it is the dominant strategy for both, leading to a Nash equilibrium where both firms advertise.

Table 17-28 Suppose That Two Firms Determine That Each Could Lower Its