Suppose That Each of the Only Two Firms in an Industry

question 119

Multiple Choice

Suppose that each of the only two firms in an industry has the independent choice of advertising its product or not advertising.If neither advertises, each gets $20 million in profit; if both advertise, their profits will be $10 million each; and if one advertises while the other does not, the advertiser gets $25 million profit while the other gets $4 million profit.According to game theory, the likely strategy by the firms is:

• A)both may or may not advertise.
• B)one will advertise and the other will not.
• C)both will advertise.
• D)neither will advertise.

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Definitions:

Market Risk Premium

The additional return expected by investors for taking on the higher risk of investing in the stock market over a risk-free asset.

Dividend Growth

The rate at which a company's dividend payments increase over time, often used as an indicator of financial health and future performance.