The city of Dustin is going to grant an exclusive contract to provide cable TV for the next year.The economic profit of the contract is thought to be $5 million.MegaCable and Acme are competing for the contract.The firm that spends the most on lobbying will be awarded the contract.
If both firms refrain from spending anything on lobbying efforts,the expected profit of the contract is

Question

Quizplus · Accepted Answer

If both firms refrain from spending on lobbying, the contract will be granted based on some other criteria, such as the quality of the services offered or the proposed price. In this case, we do not have any information to determine how the contract will be awarded, so we can assume that the chance of either firm getting the contract is the same, i.e., 50%.

Therefore, the expected profit for each firm if they do not spend on lobbying would be half of the economic profit, which is $2.5 million.

The City of Dustin Is Going to Grant an Exclusive