Suppose that each of the two firms in a duopoly has the independent choice of advertising 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 profit of $15 million and the other gets profit of $2 million.According to game theory,the Nash equilibrium is that:
A)both may or may not advertise.
B)one will advertise and the other will not.
C)both will advertise.
D)neither will advertise.

Question

Quizplus · Accepted Answer

In this scenario, both firms advertising is the Nash equilibrium because each firm's decision to advertise is the best response to the other firm's decision to advertise. If one firm chooses not to advertise while the other does, the non-advertiser would only get $2 million in profit, which is less than the $5 million they would get if they also chose to advertise. Therefore, both firms are incentivized to advertise, making it the equilibrium outcome.

Suppose That Each of the Two Firms in a Duopoly