Table 17-29 Suppose That Two Firms, Wild Willy's Wonderdrink (Firm W) and W)

question 197

Multiple Choice

Table 17-29
Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H) , comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But 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 energy drinks, 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 W
Breaks agreement Maintains agreement
and advertises and does not advertise
-Refer to Table 17-29. Which of the following statements does not correctly characterize the outcome of this game?

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

---

Definitions:

Silver Futures

Contracts to buy or sell silver at a future date at a predetermined price, often used for hedging or speculative purposes.

S&P 500 Index

A stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States, widely regarded as the best single gauge of large-cap U.S. equities.

Pork Bellies

Futures contracts traded on the commodity markets, representing 40,000 lbs of frozen, trimmed bellies from hogs, which are used to make bacon.

Cash Delivery

The process of settling a futures or options contract by exchanging the cash equivalent of the asset rather than the physical asset itself.