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 hand your business down to your children (and this "bequest" goes on forever),then a Nash equilibrium when the interest rate is zero is:
A) for each firm to not advertise until the rival does, and then to advertise forever.
B) for your firm to never advertise.
C) for your firm to always advertise when your rival does.
D) for each firm to advertise until the rival does not advertise, and then not advertise forever.

Question

Quizplus · Accepted Answer

When the interest rate is zero, future profits are valued equally to current profits. The strategy of not advertising until the rival does, and then advertising forever, is a Nash equilibrium because it maximizes long-term profits by maintaining the higher profit of $10 million each when neither advertises, while deterring unilateral advertising by threatening to advertise if the rival does.

Consider the Following Information for a Simultaneous Move Game: If