1. To advertise or not to advertise Suppose that Fizzo and Pop Hop are the only
ID: 1118108 • Letter: 1
Question
1. To advertise or not to advertise Suppose that Fizzo and Pop Hop are the only two firms that sell orange soft drink. The following payoff matrix shows the profits (in millions of dollars) each company will earn depending on whether it advertises. For example, the upper right cell shows that if Fizzo advertises and Pop Hop doesn't advertise, Fizzo will make a profit of $7 million and Pop Hop will make a profit of $1 million Both Fizzo and Pop Hop are profit-maximizing firms. Pop Hop Advertise Don't Advertise Advertise 3, 3 7, 1 Fizzo Don't Advertise 1, 7 If Fizzo decides to advertise, it will earn a profit of if Pop Hop advertises and a profit of if Pop Hop does not advertise If Fizzo decides not to advertise, it will earn a profit of if Pop Hop advertises and a profit of if Pop Hop does not advertise If Pop Hop advertises, Fizzo makes a higher profit if it chooses If Pop Hop doesn't advertise, Fizzo makes a higher profit if it chooses Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing? Both firms will choose to advertise O Fizzo will choose not to advertise, and Pop Hop will choose to advertise Both firms will choose not to advertise Fizzo will choose to advertise, and Pop Hop will choose not to advertise Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing? Both firms will choose to advertise Both firms will choose not to advertise O Fizzo will choose to advertise, and Pop Hop will choose not to advertise O Fizzo will choose not to advertise, and Pop Hop will choose to advertise It might be easier for Fizzo and Pop Hop to achieve the cooperative outcome of the game if: The game were repeated for an indefinite period of time The payoffs of the game were doubled O The payoffs of the game were cut in half It were difficult to monitor whether the other player was advertisingExplanation / Answer
If Fizzo decides to advertise, it will earn a profit of $3 mn if Pop Hop advertises and a profit of $7 mn if Pop Hop does not advertise.
If Fizzo decides not to advertise, it will earn a profit of $1 mn if Pop Hop advertises and a profit of $5 mn if Pop Hop does not advertise.
If Pop Hop advertises, Fizzo makes a higher profit if it chooses to advertise.
If Pop Hop doesn't advertise, Fizzo makes a higher profit if it chooses to advertise.
1) Correct option - Both firms will choose to advertise.
2) Correct option - Both firms will choose not to advertise.
3) Correct option - The game were repeated for an indefinite period of time
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