If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is:
A) for each firm to advertise.
B) for neither firm to advertise.
C) for your firm to advertise and the other not to advertise.
D) None of the answers is correct.

Question

Quizplus · Accepted Answer

If neither firm advertises, each firm will earn $10 million in profits. This is the highest profit that each firm can earn, so it is the Nash equilibrium.

If You Advertise and Your Rival Advertises, You Each Will