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

question 282

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 statement(s) correctly characterizes the outcome of this game?

• A)There is a Nash equilibrium when both firms advertise.
• B)Both Firm W and Firm H have a dominant strategy to advertise.
• C)Although both firms collectively would earn higher profits by maintaining the agreement not to advertise, self-interest will cause each firm to break the agreement.
• D)All of the above are correct.

---

Definitions:

Collective Agreement

A written contract negotiated between an employer and a union representing the employees, outlining the terms of employment, working conditions, and wages.

Arbitration Boards

Panels established to resolve disputes between parties through the arbitration process rather than through court litigation.

Binding Awards

Decisions made by an arbitrator or judicial body that are legally enforceable and must be adhered to by the parties involved.

Restraint Of Trade

Agreement between firms to fix prices, injure competition, or prevent others from entering a market.