Suppose there is a small town with two high-end restaurants. Suppose additionally that a major convention is coming to town. The restaurants are deciding whether to create print advertising to distribute at the convention in.order.to advertise their restaurant. • If they both advertise, the advertising will cancel and both restaurants will get the same amount of business as if they had not advertised, so the advertising expense will have been wasted, • If they both choose not to advertise, they will save the cost of advertising. • If one advertises and the other does not, the advertising restaurant will pull business away from its competitor and will end up with higher revenue. The payoff matrix is below.
Suppose there is a small town with two high-end restaurants. Suppose additionally that a major convention is coming to town. The restaurants are deciding whether to create print advertising to distribute at the convention in.order.to advertise their restaurant. • If they both advertise, the advertising will cancel and both restaurants will get the same amount of business as if they had not advertised, so the advertising expense will have been wasted, • If they both choose not to advertise, they will save the cost of advertising. • If one advertises and the other does not, the advertising restaurant will pull business away from its competitor and will end up with higher revenue. The payoff matrix is below.
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter9: Monopoly
Section: Chapter Questions
Problem 26CTQ: Why are generic pharmaceuticals significantly cheaper than name brand ones?
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Suppose there is a small town with two high-end restaurants. Suppose additionally that a major
convention is coming to town. The restaurants are deciding whether to create print advertising to
distribute at the convention in.order.to advertise their restaurant.
If they both advertise, the advertising will cancel and both restaurants will get the same amount of
business as if they had not advertised, so the advertising expense will have been wasted,
If they both choose not to advertise, they will save the cost of advertising.
• If one advertises and the other does not, the advertising restaurant will pull business away from
its competitor and will end up with higher revenue.
The payoff matrix is below.
Restaurant A
Advertise
Dont Advertise
A's Economic Profit
=-$3000
A's Economic Profit
B's
Economic Profit = 0
B's Economic Profit
-$3000
A's Economic Profit
= $3000
A's Economic Profit
= $1000
B's Economic Profit
-$3000
B's
Economic Proft - $1000
a) Is there a dominant strategy for Restaurant A?
b) Is there a dominant strategy for Restaurant B?
c) If there is a dominant strategy, is it profit-maximizing?
d) Is this a Nash equilibrium? Explain.
e) If the convention planners sign a 5-year contract ensuring that they will be back each year, will
the advertising decisions be different? Explain.
Restaurant B](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd0d4a7bf-859c-4f37-9c69-b1e98bd75ead%2Ff7acc2f7-9e72-4124-8bec-15f30a01f2bb%2F9kueyo_processed.png&w=3840&q=75)
Transcribed Image Text:Expert Q&A
Done
Suppose there is a small town with two high-end restaurants. Suppose additionally that a major
convention is coming to town. The restaurants are deciding whether to create print advertising to
distribute at the convention in.order.to advertise their restaurant.
If they both advertise, the advertising will cancel and both restaurants will get the same amount of
business as if they had not advertised, so the advertising expense will have been wasted,
If they both choose not to advertise, they will save the cost of advertising.
• If one advertises and the other does not, the advertising restaurant will pull business away from
its competitor and will end up with higher revenue.
The payoff matrix is below.
Restaurant A
Advertise
Dont Advertise
A's Economic Profit
=-$3000
A's Economic Profit
B's
Economic Profit = 0
B's Economic Profit
-$3000
A's Economic Profit
= $3000
A's Economic Profit
= $1000
B's Economic Profit
-$3000
B's
Economic Proft - $1000
a) Is there a dominant strategy for Restaurant A?
b) Is there a dominant strategy for Restaurant B?
c) If there is a dominant strategy, is it profit-maximizing?
d) Is this a Nash equilibrium? Explain.
e) If the convention planners sign a 5-year contract ensuring that they will be back each year, will
the advertising decisions be different? Explain.
Restaurant B
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