Table 16-8
Consider two countries, Eudora and the Inhabit, that are engaged in an arms race.The question each country must face is whether to build new weapons or to disarm existing weapons.Each country prefers to have more arms than the other because a large arsenal gives it more influence in world affairs.But each country also prefers to live in a world safe from the other country's weapons.The table shows the possible outcomes for each decision combination.
-Refer to the information provided.What will these two companies do if they behave as individual profit maximisers?
A)they will both advertise
B)neither will advertise
C)one will advertise, the other will not
D)there is no way of knowing without more information

Question

Table 16-8
Consider two countries, Eudora and the Inhabit, that are engaged in an arms race.The question each country must face is whether to build new weapons or to disarm existing weapons.Each country prefers to have more arms than the other because a large arsenal gives it more influence in world affairs.But each country also prefers to live in a world safe from the other country's weapons.The table shows the possible outcomes for each decision combination. 
-Refer to the information provided.What will these two companies do if they behave as individual profit maximisers?
A)they will both advertise 
B)neither will advertise 
C)one will advertise, the other will not 
D)there is no way of knowing without more information

Quizplus · Accepted Answer

When companies behave as individual profit maximisers, they will choose the strategy that leads to the highest payoff for themselves, regardless of the other's actions. In scenarios like the Prisoner's Dilemma, which this question implies, both companies advertising often leads to a Nash Equilibrium where, despite not being the optimal collective outcome, it is the stable strategy for both when acting in their own self-interest.

Table 16-8 Consider Two Countries, Eudora and the Inhabit, That Are Engaged