Suppose That Each of the Two Firms in a Duopoly

question 131

Multiple Choice

Suppose that each of the two firms in a duopoly has the independent choice of advertising or not advertising.If neither advertises,each gets $10 million in profit;if both advertise,their profits will be $5 million each;and if one advertises while the other does not,the advertiser gets profit of $15 million and the other gets profit of $2 million.According to game theory,if the firms collude to maximize joint profits:

• A)both may or may not advertise.
• B)one will advertise and the other will not.
• C)both will advertise.
• D)neither will advertise.

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Definitions:

Automobile Industry

A sector of the economy focused on the manufacturing, designing, and selling of motor vehicles.

Total Quality Management

A management approach to long–term success through customer satisfaction, involving all members of an organization in improving processes, products, services, and the culture in which they work.