Table 17-2 Suppose That Two Firms Determine That Each Could Lower Its

question 343

Multiple Choice

Table 17-2
Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising budgets.But in order for the plan to work,each firm must agree to refrain from advertising.Each firm believes that advertising works by increasing the demand for the firm's product,but each firm also believes that if neither firm advertises,the cost savings will outweigh the lost sales.The table below lists each firm's individual profits:
Firm A
Breaks agreement Maintains agreement
and advertises and does not advertise

-Refer to Table 17-2.Which of the following statement(s) correctly characterizes the outcome of this game?

• A) Both Firm A and Firm B have a dominant strategy to advertise.
• B) There is a Nash equilibrium when both firms advertise.
• C) Although both firms collectively would earn higher profits by maintaining the agreement not to advertise,self-interest will cause each firm to break the agreement.
• D) All of the above are correct.

---

Definitions:

Commodity Futures Contract

A standardized contract to buy or sell a particular commodity at a predetermined price at a specified time in the future.

Call Option

An agreement granting the buyer the option to purchase an asset at a predetermined price until the option expires, providing potential profit opportunities from price increases.

Financial Assets

Tangible or intangible assets held for economic benefits in the form of investments, cash, stocks, bonds, and real estate.