Table 17-23
Two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their costs, and thus increase their profits, if they reduced their advertising budgets. But 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 costs savings will outweigh the lost sales. Listed in the table below are the individual profits for each firm.
-Refer to Table 17-23. Suppose that the two firms, A and B, make an agreement to withhold any advertising for one month to lower each firm's costs and raise each firm's profits. If the firms reach the Nash equilibrium,
A)both firms will choose not to advertise.
B)firm A will choose not to advertise, but firm B will break the agreement and choose to advertise.
C)firm B will choose not to advertise, but firm A will break the agreement and choose to advertise.
D)both firms will break the agreement and choose to advertise.

Question

Table 17-23
Two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their costs, and thus increase their profits, if they reduced their advertising budgets. But 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 costs savings will outweigh the lost sales. Listed in the table below are the individual profits for each firm. 
-Refer to Table 17-23. Suppose that the two firms, A and B, make an agreement to withhold any advertising for one month to lower each firm's costs and raise each firm's profits. If the firms reach the Nash equilibrium,
A)both firms will choose not to advertise. 
B)firm A will choose not to advertise, but firm B will break the agreement and choose to advertise. 
C)firm B will choose not to advertise, but firm A will break the agreement and choose to advertise. 
D)both firms will break the agreement and choose to advertise.

Quizplus · Accepted Answer

In a Nash equilibrium, each firm chooses the best strategy given the strategy chosen by the other firm. In this scenario, both firms have an incentive to advertise to maximize their own profits, even if it means breaking the agreement, leading both to choose to advertise.

Table 17-23 Two Bottled Beverage Manufacturers (Firm a and Firm B) Determine