1. To advertise or not to advertise Suppose that Creamland and Dairy King are th
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Question
1. To advertise or not to advertise Suppose that Creamland and Dairy King are the only two firms that sell ice cream. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises: Dairy King Advertise Doesn't Advertise Advertise 10, 10 Creamland Doesn't Avtise 2, 18 11, 11 For example, the upper right cell shows that if Creamland advertises and Dairy King doesn't advertise, Creamland will make a profit of $18 million, and Dairy King will make a profit of $2 million. Assume this is a simultaneous game and that Creamland and Dairy King are both profit-maximizing firms. If Creamland decides to advertise, it will earn a profit of million if Dairy King advertises and a profit of$ million if Dairy King does not advertise If Cream!and decides not to advertise, it will earn a profit of million if Dairy King advertises and a profit of million if Dairy King does not advertise. If Dairy King advertises, Creamland makes a higher profit if it chooses to advertise If Dairy King doesn't advertise, Creamland makes a higher profit if it c not to advertise Suppose that both firms start off not advertising. If the firms act indep tegies will they end up choosing? O Creamland will choose to advertise and Dairy King will choose not to advertise O Both firms will choose not to advertise O Creamland will choose not to advertise and Dairy King will choose to advertise Both firms will choose to advertise Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing? O Both firms will choose not to advertise Both firms will choose to advertise O Creamland will choose to advertise and Dairy King will choose not to advertise O Creamland will choose not to advertise and Dairy King will choose to advertiseExplanation / Answer
Looking at the payoff matrix
If Creamland decide to advertise, it will earn a profit of $10 million if Dairy King advertises and a profit of $18 million if Dairy King does not advertise
If Creamland decide not to advertise, it will earn a profit of $2 million if Dairy King advertises and a profit of $11 million if Dairy King does not advertise
If Dairy king advertises then Creamland will make higher profit if it chooses to advertise i.e. $10 million ( if it does not advertise then it will make profit of $2 million)
If Dairy king does not advertises then Creamland will make higher profit if it chooses to advertise i.e. $18 million ( if it does not advertise then it will make profit of $11 million)
If the firms start off by not advertising. If they are acting independently then both firm will choose to advertise i.e. option 'd'. (As both firms are will try maximize profits so if they do not choose to advertise and other firm advertise then their profit would reduce and by advertising they can also increase their profits if other firm did not advertise. Although payoff would be higher if both firms decides not to advertise but no one will take that risk because it will reduce profit if other firm advertises.)
If the firms start off by not advertising. If they are colluding then both firm will choose not to advertise i.e. option 'a'. (As both firms would want to maximize their profits and this can only happen if both firms decide not to advertise. Now the firms are colluding so they can take that risk of not advertising and maximising their profits.)
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