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

question 312

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 statements does not correctly characterize the outcome of this game?

• A)There is a Nash equilibrium.
• B)Both firms collectively would earn the highest joint profits by maintaining the agreement not to advertise.
• C)Only one firm has a dominant strategy.
• D)The game is an example of the Prisoners' Dilemma.

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Definitions:

Geneva Convention

A series of international treaties formulated to ensure humane treatment of prisoners, the wounded, and civilians during war.

Prisoners of War

Individuals captured and held by an enemy during an armed conflict, whose treatment is governed by the rules of international humanitarian law.

GATT

The General Agreement on Tariffs and Trade, an international treaty designed to promote international trade by reducing or eliminating trade barriers.

Covering Law

In the philosophy of science, a general law that 'covers' or explains a set of phenomena, making them predictable and understandable.