Two Stores Are Located Side by Side

question 19

Multiple Choice

Two stores are located side by side. They attract customers to each other and to themselves by advertising. The profit functions of the two stores are (75 + x₂) x₁ - 2x²₁ for store 1 and (105 + x₁) x₂ - 2x²₂ for store 2, where x₁ and x₂ are total advertising expenditures by stores 1 and 2 respectively. If each store sets its advertising expenditures independently (as in Nash equilibrium) , how much would store 1 spend on advertising?

• A) $27
• B) $29
• C) $32
• D) $24
• E) None of the above.

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Definitions:

Manufacturing Overhead Budget

A detailed plan showing the production costs, other than direct materials and direct labor, that will be incurred over a specified time period.

Direct Materials

Raw materials that can be directly traced to the manufacturing process of a product and are an integral part of the finished good.

Direct Labor

The cost of workers who can be easily identified with the manufacturing process of a product.

Control

The process of gathering feedback to ensure that a plan is being properly executed or modified as circumstances change.