If you advertise and your rival advertises,you each will earn $4 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million.If you and your rival plan to hand your business down to your children (and this "bequest" goes on forever),then a Nash equilibrium is for each firm to:
A) not advertise until the rival does, and then to advertise forever.
B) never advertise.
C) always advertise.
D) advertise until the rival does not advertise, and then not advertise forever.

Question

Quizplus · Accepted Answer

In this scenario, the Nash equilibrium is for both firms to never advertise. This is because if both firms choose not to advertise, they each earn the highest possible profit of $10 million. Any deviation from this strategy (i.e., choosing to advertise) would result in a lower profit for the deviating firm, making it an undesirable choice. This setup ensures that not advertising is the best response for each firm, regardless of the other firm's decision, fulfilling the criteria for a Nash equilibrium.

If You Advertise and Your Rival Advertises,you Each Will Earn