Managerial Economics 2nd Edition by William Boyes

Exercise 2

Firm 1 and Firm 2 are the only ones that produce and sell good X. Each of them is trying to decide (independently and simultaneously) how much to spend on advertising. Sales and profits of each firm depend on its own advertising strategy, and also on its competitor's. Each firm can either choose a low level of expenditures on advertising or a high one; if both choose low, profits for each firm will be 60 (millions), and if both choose high, each of them will make 20 (millions).However, if one chooses low and the other chooses high, the one that chooses low makes 40 (millions) and the other one 95 (millions). Using the Nash equilibrium concept, determine howmany and what are the Nash equilibria.