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. At the Nash equilibrium, how much profit will Firm B earn?
A)$3,500 because firm B will maintain the agreement not to advertise, but firm A will break the agreement and choose to advertise.
B)$4,000 because each firm will break the agreement and choose to advertise.
C)$5,000 because each firm will maintain the agreement and choose not to advertise.
D)$6,000 because firm A will maintain the agreement not to advertise, but firm B 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. At the Nash equilibrium, how much profit will Firm B earn?
A)$3,500 because firm B will maintain the agreement not to advertise, but firm A will break the agreement and choose to advertise. 
B)$4,000 because each firm will break the agreement and choose to advertise. 
C)$5,000 because each firm will maintain the agreement and choose not to advertise. 
D)$6,000 because firm A will maintain the agreement not to advertise, but firm B will break the agreement and choose to advertise.

Quizplus · Accepted Answer

In a Nash equilibrium, both firms will choose to advertise because it is the dominant strategy for both, leading to a profit of $4,000 for Firm B.

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