Question 4: Suppose two firms, Genera Pharma and Futura Pharma, are the only two

Question

Question 4: Suppose two firms, Genera Pharma and Futura Pharma, are the only two producers of a specific drug. Genera and Futura have the same formula and sell the drug for the same price, but they are considering whether or not to spend money on an advertising campaign. Each firm can either buy the advertising campaign or not buy it and the following table shows profits for four different scenarios Genera AD AD 4,4) 9,0) NoAD (0,9) (5,5) No AD Futura 1. What is the scenario that maximizes the sum of profits of the two companies? 2. Is there a dominant strategy for each firm? 3. What is the pure strategy Nash Equilibrium? 4. Denote the probability of choosing AD for Futura as f and for Genera as g. Find the best response function for Futura, bf (g), and Genera, bg (f)

Explanation / Answer

Answer:- Both the companies are going to maximize their profits when both of them adopted the strategy of AD.

Answer:- Yes , when Genera decides to Ad then the best strategy which provide             Futura the best payoff is also to Ad. When Genera decided Not Ad, in this case, Futura will select to Ad therefore irrespective of the strategy adopted by Genera, Futura will opt the strategy of AD therefore the dominant strategy of Futurais to AD.

While for, Generia, the best strategy providing the maximum payoff is to AD irrespective of the strategy decided by Futura. Therefore the dominant strategy of Generia is also AD.                

Answer:- The pure strategy Nash Equilibrium is AD which will provide the payoff of (4,4)

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