Consider the following information for a simultaneous move game: If you advertise and your rival advertises,you each will earn $5 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million.If you and your rival plan to be in business for 10 years,then the Nash equilibrium is:
A) for each firm to advertise every year.
B) for neither firm to advertise in early years, but to advertise in later years.
C) for each firm to not advertise in any year.
D) for each firm to advertise in early years, but not advertise in later years.

Question

Quizplus · Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the other player's strategy. Here, advertising always yields a better outcome for a firm regardless of the rival's action ($5 million if both advertise, $15 million if only one advertises) compared to not advertising ($10 million if neither advertises, $1 million if the rival advertises). Thus, the equilibrium is for both to advertise every year to ensure they do not end up with the worst outcome of $1 million.

Consider the Following Information for a Simultaneous Move Game: If