If you advertise and your rival advertises,you each will earn $3 million in profits.If neither of you advertises,you will each earn $7 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $10 million and the non-advertising firm will earn $1 million.If you and your rival plan to be in business for 15 years,then the Nash equilibrium is for:
A) you and your rival to not advertise in any year.
B) you and your rival to advertise every year.
C) neither firm to advertise in early years, but to advertise in later years.
D) each firm to advertise in early years, but not advertise in later years.

Question

Quizplus · Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the other player's strategy. Here, if one firm advertises while the other does not, the advertising firm earns significantly more ($10 million vs. $1 million). This creates a strong incentive for both firms to advertise to avoid being the non-advertising firm that earns only $1 million. Thus, even though both firms would be better off not advertising (earning $7 million each), the dominant strategy for both is to advertise to avoid the worst outcome, leading to both firms advertising every year as the Nash equilibrium.

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