Table 17-7
Two companies, Wonka and Gekko, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies.

-Juan Pablo and Zak are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $8,000. If they both advertise on radio, each will earn a profit of $14,000. If neither advertises at all, each will earn a profit of $20,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $12,000 and the other will earn $10,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $22,000 and the other will earn $4,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $24,000 and the other will earn $8,000. If both follow their dominant strategy, then Juan Pablo will
A)advertise on TV and earn $8,000.
B)advertise on radio and earn $14,000.
C)advertise on TV and earn $22,000.
D)not advertise and earn $20,000.

Question

Table 17-7
Two companies, Wonka and Gekko, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies.
 
-Juan Pablo and Zak are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $8,000. If they both advertise on radio, each will earn a profit of $14,000. If neither advertises at all, each will earn a profit of $20,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $12,000 and the other will earn $10,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $22,000 and the other will earn $4,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $24,000 and the other will earn $8,000. If both follow their dominant strategy, then Juan Pablo will
A)advertise on TV and earn $8,000. 
B)advertise on radio and earn $14,000. 
C)advertise on TV and earn $22,000. 
D)not advertise and earn $20,000.

Quizplus · Accepted Answer

DA dominant strategy is the best action for a player, regardless of what the opponent does. In this scenario, advertising on radio is the dominant strategy for both because it yields a higher profit than advertising on TV or not advertising, regardless of the opponent's choice. However, if both follow their dominant strategy and advertise on radio, they each earn $14,000. If neither advertises, which is also a rational outcome if they could coordinate (not a dominant strategy but a Nash Equilibrium), they would each earn $20,000, maximizing their profit without any advertising costs.

Table 17-7 Two Companies, Wonka and Gekko, Each Decide Whether to Produce