Two Competitive Firms Are Located Side by Side

question 43

Multiple Choice

Two competitive firms are located side by side.If firm A advertises,firm B will get new customers too,even though it does not have to pay for the advertising cost.The same scenario is true for A if B advertises.If both advertise,the amount of extra revenue generated would just offset the advertising costs.In such case,game theory suggests

• A) that only A will advertise.
• B) that only B will advertise.
• C) that both A and B will advertise.
• D) that neither A nor B will advertise.
• E) nothing in terms of predicting the outcome of the game.

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Definitions:

Misallocated

Describes resources or efforts that are used inefficiently or inappropriately, leading to suboptimal outcomes.

Perfectly Competitive

A market structure characterized by a large number of small firms, homogeneous products, and free entry and exit, leading to price takers rather than makers.

Worthless Coin

A coin that has lost its value as currency, often due to hyperinflation or being phased out of circulation.

Inefficient Exchange

Occurs when there is a missed opportunity in the allocation of goods or services that could make at least one individual better off without making anyone else worse off.