Table 17-28 Suppose That Two Firms Determine That Each Could Lower Its

question 518

Multiple Choice

Table 17-28
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 17-28. 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.

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Definitions:

Yellow Dog Contracts

Employment agreements where the worker agrees not to join a labor union as a condition of employment, mainly historical and now illegal in the US.

Injunctions

Court orders that compel a party to do or refrain from specific acts, often used in labor disputes to stop certain actions by unions or employers.

Picketing

A form of protest or demonstration by workers, often involving carrying signs and marching at the workplace's entrance, aimed at drawing public attention to issues like unfair labor practices.

Mainstream Economics

The body of economic thought and theory that is widely accepted and taught across major universities and colleges, focusing on market equilibrium, demand and supply, and the role of government interventions.