Table 17-29
Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H), comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms 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 energy drinks, 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 W
Breaks agreement Maintains agreement
and advertises and does not advertise
-Refer to Table 17-29. Which of the following statement(s) correctly characterizes the outcome of this game?
A)There is a Nash equilibrium when both firms advertise.
B)Both Firm W and Firm H have a dominant strategy to advertise.
C)Although both firms collectively would earn higher profits by maintaining the agreement not to advertise, self-interest will cause each firm to break the agreement.
D)All of the above are correct.

Question

Table 17-29
Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H), comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms 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 energy drinks, 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 W
Breaks agreement Maintains agreement
and advertises and does not advertise 
-Refer to Table 17-29. Which of the following statement(s) correctly characterizes the outcome of this game?
A)There is a Nash equilibrium when both firms advertise. 
B)Both Firm W and Firm H have a dominant strategy to advertise. 
C)Although both firms collectively would earn higher profits by maintaining the agreement not to advertise, self-interest will cause each firm to break the agreement. 
D)All of the above are correct.

Quizplus · Accepted Answer

In the context of game theory, all the statements are correct: A Nash equilibrium occurs when both firms advertise, both firms have a dominant strategy to advertise, and self-interest leads them to break agreements for higher collective profits.

Table 17-29 Suppose That Two Firms, Wild Willy's Wonderdrink (Firm W) and W)