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 10 years,then the Nash equilibrium is:
A) for each firm to advertise every year.
B) for neither firm to advertise in early years, but to advertise in later years.
C) for each firm to not advertise in any year.
D) for each firm to advertise in early years, but not advertise in later years.

Question

Quizplus · Accepted Answer

The Nash equilibrium is the scenario where neither firm advertises in any year. This is because if one firm advertises and the other does not, the non-advertising firm earns a higher profit ($5 million) than the advertising firm ($1 million). Therefore, if one firm advertises, the other firm will have an incentive to not advertise and earn a higher profit. If both firms advertise, they will earn lower profits ($4 million) than if neither of them advertise ($10 million). Thus, the Nash equilibrium is for each firm to not advertise in any year.

If You Advertise and Your Rival Advertises,you Each Will Earn