Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S. Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box. If both companies sign an athlete, they will each make $5 million in economic profit. If only firm signs, they earn $8 million in economic profit and the other firm incurs an economic loss of $1 million. If neither firm signs, they break even. What is the outcome of this game if it is only played once?
A) Neither Kellogg's nor General Mills will sign an athlete.
B) Kellogg's will sign an athlete and General Mills will not sign an athlete.
C) Both Kellogg's and General Mills will sign an athlete.
D) General Mills will sign an athlete and Kellogg's will not sign an athlete.

Question

Quizplus · Accepted Answer

In a one-time game, both firms will choose to sign the athlete to avoid the risk of incurring a loss. This results in both making $5 million, which is better than the potential loss of $1 million if they don't sign and the other does.

Kellogg's and General Mills Are Two of the Dominant Breakfast