Foundations of Economics, Student Value Edition (8th Edition)
8th Edition
ISBN: 9780134489230
Author: Robin Bade, Michael Parkin
Publisher: PEARSON
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Question
Chapter 18, Problem 6MCQ
To determine
To choose:
The option that correctly explains the effect of advertising in the prisoners' dilemma game.
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e) Suppose two companies in an industry advertise where the marginal benefit of advertising expenditure is 0. what this means is, if each company increased their advertising by $50 million, both would see their profits fall by $50 million but if they both cut their advertising by $50 million they would both see their profits go up by $50 million. However if one increased advertising by $50 million and the other decreased advertising $50 million, the firm increasing their advertising would increase their profits by $100 million and the firm cutting their advertising expenditure would see the profit decrease by $100 million. What is the optimal outcome? Does each firm have a dominant strategy? If so, will following their dominant strategy result in the optimal outcome?
1. Find pure strategy Nash equilibrium and find the outcome, that will be played in cooperation. Explain clearly.
Question 25
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?
Both companies will advertise. Brown Inc. earns $40.
Neither company will advertise. Brown Inc. earns $60.
Both companies will advertise. PM Inc. earns $60.
One company will advertise, and the other will not. Brown Inc. earns $70.
Chapter 18 Solutions
Foundations of Economics, Student Value Edition (8th Edition)
Ch. 18 - Prob. 1SPPACh. 18 - Prob. 2SPPACh. 18 - Prob. 3SPPACh. 18 - Prob. 4SPPACh. 18 - Prob. 5SPPACh. 18 - Prob. 6SPPACh. 18 - Prob. 7SPPACh. 18 - Prob. 8SPPACh. 18 - Prob. 1IAPACh. 18 - Prob. 2IAPA
Ch. 18 - Prob. 3IAPACh. 18 - Prob. 4IAPACh. 18 - Use this information to work Problems 5 to 7. DOJ...Ch. 18 - Use this information to work Problems 5 to 7. DOJ...Ch. 18 - Prob. 7IAPACh. 18 - Which of the following statements is incorrect. In...Ch. 18 - If firms in oligopoly form a cartel, it will...Ch. 18 - Prob. 3MCQCh. 18 - Prob. 4MCQCh. 18 - Prob. 5MCQCh. 18 - Prob. 6MCQCh. 18 - Prob. 7MCQ
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