Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $60 million each. If they both advertise, they again split the market, but profits are lower by $20 million since each company must bear the cost of advertising. Yet, if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $70 million while the company that does not advertise earns only $30 million. What will these two companies do if they behave as individual profit maximizers? One company will advertise, and the other will not. Brown Inc. earns $70. Both companies will advertise. PM Inc. earns $60. Neither company will advertise. Brown Inc. earns $60. Both companies will advertise. Brown Inc. earns $40.
Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $60 million each. If they both advertise, they again split the market, but profits are lower by $20 million since each company must bear the cost of advertising. Yet, if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $70 million while the company that does not advertise earns only $30 million. What will these two companies do if they behave as individual profit maximizers? One company will advertise, and the other will not. Brown Inc. earns $70. Both companies will advertise. PM Inc. earns $60. Neither company will advertise. Brown Inc. earns $60. Both companies will advertise. Brown Inc. earns $40.
Micro Economics For Today
10th Edition
ISBN:9781337613064
Author:Tucker, Irvin B.
Publisher:Tucker, Irvin B.
Chapter10: Monopolistic Competition And Oligoply
Section: Chapter Questions
Problem 18SQ
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Transcribed Image Text:Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $60 million each. If they both advertise, they again split the
market, but profits are lower by $20 million since each company must bear the cost of advertising. Yet, if one company advertises while the other does not, the one that advertises attracts
customers from the other. In this case, the company that advertises earns $70 million while the company that does not advertise earns only $30 million. What will these two companies do if they
behave as individual profit maximizers?
One company will advertise, and the other will not. Brown Inc. earns $70.
Both companies will advertise. PM Inc. earns $60.
Neither company will advertise. Brown Inc. earns $60.
Both companies will advertise. Brown Inc. earns $40.
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