Essentials of Economics 2nd Edition by Campbell McConnell, Randy Grant, Stanley Brue

Exercise 10

Construct a game-theory matrix to illustrate the text example of two firms and their decisions on high versus low advertising budgets and the effects of each on profits. Show a circumstance in which both firms select high advertising bud­gets even though both would be more profit­able with low advertising budgets. Why won't they unilaterally cut their advertising budgets Explain why this is an example of the prisoner's dilemma.