Use the Following to Answer Questions

question 152

Multiple Choice

Use the following to answer questions:
-(Table: Coke and Pepsi Advertising Game) Look at the table Coke and Pepsi Advertising Game. The soft-drink industry is dominated by Coca-Cola and Pepsi, and each firm spends a lot of money on advertising. Suppose each firm is considering a costly television commercial during halftime of the Super Bowl. The table shows the payoff matrix of profits that each firm would receive from their advertising decision, given the advertising decision of their rival. Profits in each cell of the payoff matrix are given as (Coke, Pepsi) . If both firms expect to play this game every year for the foreseeable future, in the outcome Coke _____ and Pepsi _____.

• A) advertises; does not advertise
• B) does not advertise; advertises
• C) does not advertise; does not advertise
• D) advertises; advertises

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Definitions:

Average Cost

The total cost of production divided by the number of units produced, indicating the cost per unit.

Consumer Surplus

The bifurcation between what a consumer wishes to pay for a service or good, and what ends up being spent.

Producer Surplus

The difference between what producers are willing to sell a good for and the actual market price of the good.

Deadweight Loss

Deadweight loss refers to the loss of economic efficiency that can occur when the equilibrium for a good or a service is not achieved or is not achievable, often due to market distortion such as taxes or subsidies.