Two stores that compete for most of the market in a town must choose their adver
ID: 1223606 • 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"
12- Smith’s:
has a dominant strategy: choose a high level of advertising.
has a dominant strategy: choose a low level of advertising.
has a dominated strategy: choose a high level of advertising.
has a dominated strategy: choose a low level of advertising.
both b and c.
both a and d.
Explanation / Answer
As per the pay-off table, if Dale's store chooses high advertising level then Smith's store will earn a weekly profit of $11,000 if it also choose high advertising level and will earn a weekly profit of $9,000 if it choose low advertising level. Since pay-off is higher in case of high advertising level, Smith's store will choose high advertising level if Dale's store choose high advertising level.
If Dale's store chooses low advertising level then Smith's store will earn a weekly profit of $8,000 if it choose high advertising level and will earn a weekly profit of $7,000 if it also choose low advertising level. Since pay-off is higher in case of high advertising level, Smith's store will choose high advertising level if Dale's store choose low advertising level.
Thus, it can be seen that Smith's store will choose high advertising level irrespective of the strategy Dale's store follows.
When a player always plays a strategy irrespective of the strategies choosen by other players that strategy is referred to as dominant strategy of that player while all other strategies available to player are called dominated strategies.
So, for Smith's store high advertising level is the dominant strategy while low advertising level is the dominated strategy.
Hence, the correct answer is option (f).
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.