Consider Two Single-Malt Whiskey Distillers, Laphroaig and Knockando

question 228

Essay

Consider two single-malt whiskey distillers, Laphroaig and Knockando.If they advertise, they can both sell more whiskey and increase their revenue.However, the cost of advertising more than offsets the increased revenue so that each distiller ends up with a lower profit than if they do not advertise.On the other hand, if only one advertises, that distiller increases its market share and also its profit.
a.Construct a payoff matrix using the following hypothetical information: If neither distiller advertises, each earns a profit of $35 million per year.If both advertise, each earns a profit of $20 million per year.If one advertises and the other does not, the distiller who advertises earns a profit of $50 million and the distiller who does not advertise earns a profit of $9 million.
b.If Laphroaig wants to maximize profit, will it advertise? Briefly explain.
c.If Knockando wants to maximize profit, will it advertise? Briefly explain.
d.Is there a dominant strategy for each distiller? Briefly explain.

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Definitions:

One-tailed Hypothesis

A hypothesis that specifies the direction of an expected difference or relationship, testing for the possibility of an effect in one direction only.

Two-tailed Hypothesis

A hypothesis test that considers both directions of effects by investigating the possibility of a relationship in two ways, either greater than or less than.

Valid Hypothesis

A scientifically grounded assertion that can be tested through empirical research or experimentation to be either supported or refuted.

Research Hypothesis

A specific, testable prediction about the expected outcome in a study, often indicating a predicted relationship between variables.