Suppose That Each of Two Firms Has the Independent Choice

question 216

Multiple Choice

Suppose that each of two firms has the independent choice of advertising its product 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 $15 million profit while the other gets $2 million profit.According to game theory, the likely strategy by the firms is:

• 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:

Marginal Product

The additional output that is produced by using one more unit of a factor of production, all other inputs remaining constant.

Profit

Total revenue minus total cost.

Diminishing Marginal Product

The principle that as more of a variable input is added to a fixed input, the additional output produced from each new unit of input will eventually decrease.

Production Function

A production function describes the relationship between inputs used in production and the output generated from those inputs.