Two stores that compete for most of the market in a town must choose their adver
ID: 1222970 • Letter: T
Question
Two stores that compete for most of the market in a town must choose their advertising levels simultaneously. The following payoff table facing the two firms, smith’s and Dale’s, shows the weekly profit outcomes for the various advertising decision combinations. Use this payoff table to answer the following 2 questions .
Dale’s advertising level
High
Low
Smith’s
advertising level
High
A
$11,000, $6,000
B
$8,000, $7,000
Low
C
$9000, 7,000
D
$7,000, $8,000
Smith’s:
a.has a dominant strategy: choose a high level of advertising.
b.has a dominant strategy: choose a low level of advertising.
c.has a dominated strategy: choose a high level of advertising.
d.has a dominated strategy: choose a low level of advertising.
e.both b and c.
f.both a and d.
And the Nash Equilibrium outcome is:
Cell A
Cell B
Cell C
Cell D
Dale’s advertising level
High
Low
Smith’s
advertising level
High
A
$11,000, $6,000
B
$8,000, $7,000
Low
C
$9000, 7,000
D
$7,000, $8,000
Explanation / Answer
1. (a) Smith's has a dominant strategy: choose a high level of advertising.
Because at high level of advertising his payoff is more as compared with low level of advertising.
2. Smith's has a dominant strategy of choosing a high level of advertising while Dale's has the dominant strategy of choosing low level of advertising because of higher payoff.
So, Nash equilibrium : (Smith high advertising; Dale lower advertising) = ($ 8,000; $ 7,000)
Cell B is the answer.
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