Suppose that Fizzy Soda and Townie Soda must choose whether to advertise their soft drinks. In a Nash equilibrium, both firms choose to advertise and earn weekly profits of $80,000. Which of the following statements is (are) TRUE?
I. Neither firm has incentive to change its advertising strategy, given the strategy choice of its rival.
II. If Townie Soda decided to stop advertising, its profits would fall below $80,000.
III. If both firms stopped advertising, it is possible that each firm could earn profits greater than $80,000.
A) I
B) II and III
C) I, II, and III
D) I and II

Question

Quizplus · Accepted Answer

I. True, because in a Nash equilibrium, each firm's strategy is the best response to the other firm's strategy, meaning neither has an incentive to deviate.II. True, because if one firm stops advertising while the other continues, the non-advertising firm would likely lose market share and profits.III. True, because if both firms stopped advertising, they could potentially save on advertising costs, which might increase their profits beyond $80,000 if those savings exceed the benefits gained from advertising.

Suppose That Fizzy Soda and Townie Soda Must Choose Whether