If you advertise and your rival advertises, you each will earn $4 million in pro

Question

If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non advertising firm will earn $5 million. Which of the following is true? A) A dominant strategy for Firm A is to advertise. B) A dominant strategy for Firm B is to advertise. C) A Nash equilibrium is for both firms to advertise. D) I think -None of the above is true

Explanation / Answer

The dominant strategy is to advertise for both you and your rival. This would mean that the nash equilibrium would be for both firms not to advertise.We conclude that the game has a unique Nash equilibrium, in which each firm's amount of advertising is maximum.Thus if we look at the matrix below it is found that if both firms are not advertising they are earning maximum revenue .

Therefore option D is correct.

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