Question

Suppose that each of the 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 a profit of $15 million while the other gets a profit of $2 million. According to game theory, if the firms could collude to maximize profit:

a. both may or may not advertise.

b.both will advertise.

c. one will advertise and the other will not.

d. neither will advertise.

Answer 1

Answer:

d. neither will advertise.

Explanation:

A game theory is used to analyse the choices of firms in an oligopoly.

A collusion is when two or more firms come together to make a decision usually concerning price.

If both firms advertise, the profit is less than when both firms don't advertise. Therefore, if both firms collude, they would agree not to advertise in order to maximise profits.

But the Nash equilibrium would be for each firm to advertise.

Nash equilibrium is the best strategy for a player in a game regardless of what the other player plays.

I hope my answer helps you.