Suppose That Each of Two Firms Has the Independent Choice

question 216

Multiple Choice

Suppose that each of two firms has the independent choice of advertising its product or not advertising.If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets $15 million profit while the other gets $2 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:

Perpetual Inventory System

An accounting method that continuously updates inventory records for each purchase and sale of inventory.

Cost of Merchandise Sold

The total cost incurred to purchase or manufacture the goods sold during a specific period.

FOB Shipping Point

A term used in shipping indicating that the buyer assumes responsibility for the goods and the cost of transportation once the goods leave the seller’s premises.

Report Form

The form of balance sheet with the Liabilities and Owner’s Equity sections presented below the Assets section.