Two stores are located side by side. They attract customers to each other and to themselves by advertising. The profit functions of the two stores are (45 + x₂)x₁ - 2x²₁ for store 1 and (75 + x₁)x₂ - 2x²₂ for store 2, where x₁ and x₂ are total advertising expenditures by stores 1 and 2 respectively. If each store sets its advertising expenditures independently (as in Nash equilibrium), how much would store 1 spend on advertising? A) $14 B) $19 C) $22 D) $17 E) None of the above.

Question

Quizplus · Accepted Answer

In Nash equilibrium, each store maximizes its profit given the advertising expenditure of the other store. By setting the derivative of store 1's profit function with respect to x1 to zero and solving for x1, we find that store 1 would spend $17 on advertising.

Two Stores Are Located Side by Side