Refer to the normal-form game of advertising shown below. $\begin{array}{c} \quad\quad\quad\quad\quad\quad\text { Firm B}\ \text { Firm A } \begin{array}{|l|l|l|} \hline & \text { Advertise } & \begin{array}{l} \text { Do Not } \ \text { Advertise } \end{array} \ \hline \text { Advertise } & \$ 0, \$ 0 & \$ 175, \$ 10 \ \hline \begin{array}{l} \text { Do Not } \ \text { Advertise } \end{array} & \$ 10, \$ 175 & \$ 125, \$ 125\ \hline \end{array}\end{array}$ Suppose there is a 50 percent chance that the advertising game depicted in Figure 10-17 will end next period.The collusive agreement {(not advertise,not advertise)} is: A) sustainable since $175 $50.

Question

Refer to the normal-form game of advertising shown below. $\begin{array}{c} \quad\quad\quad\quad\quad\quad\text { Firm B}\ \text { Firm A } \begin{array}{|l|l|l|} \hline & \text { Advertise } & \begin{array}{l} \text { Do Not } \ \text { Advertise } \end{array} \ \hline \text { Advertise } & \$ 0, \$ 0 & \$ 175, \$ 10 \ \hline \begin{array}{l} \text { Do Not } \ \text { Advertise } \end{array} & \$ 10, \$ 175 & \$ 125, \$ 125\ \hline \end{array}\end{array}$ Suppose there is a 50 percent chance that the advertising game depicted in Figure 10-17 will end next period.The collusive agreement {(not advertise,not advertise)} is: A) sustainable since $175 < $250. B) unsustainable since $175 < $25. C) sustainable since $20 > $50. D) unsustainable since $350 > $50.

Quizplus · Accepted Answer

The collusive agreement is for both firms to not advertise. If both firms stick to this agreement, then they will receive a payoff of $125 each. However, if one firm deviates and decides to advertise while the other does not, then the advertising firm will receive a payoff of $175 while the non-advertising firm will only receive $10.

Now, if there is a 50 percent chance that the game will end next period, then the expected payoffs for each action can be calculated as follows:

- Advertise: $(0.5)(0) + (0.5)(175) = 87.5
- Not Advertise: $(0.5)(125) + (0.5)(125) = 125

Therefore, both firms have an incentive to stick to the collusive agreement and not advertise, as it gives them a higher expected payoff. The collusive agreement is sustainable.

Option A is the correct answer as it correctly states that the collusive agreement is sustainable.

Refer to the Normal-Form Game of Advertising Shown Below Suppose There Is a 50 Percent Chance That the Advertising