Refer to the normal-form game of advertising shown below. $\begin{array}{c} \quad\quad\quad\quad\quad\quad\text { Firm B}\ \text { Firm A } \begin{array}{|l|l|l|} \hline & \text { Advertise } & \begin{array}{l} \text { Do Not } \ \text { Advertise } \end{array} \ \hline \text { Advertise } & \$ 0, \$ 0 & \$ 175, \$ 10 \ \hline \begin{array}{l} \text { Do Not } \ \text { Advertise } \end{array} & \$ 10, \$ 175 & \$ 125, \$ 125\ \hline \end{array}\end{array}$ Suppose there is a 20 percent chance that the advertising game depicted in Figure 10-17 will end next period.The collusive agreement {(not advertise,not advertise)} is: A) sustainable since $175 $50.

Question

Refer to the normal-form game of advertising shown below. $\begin{array}{c} \quad\quad\quad\quad\quad\quad\text { Firm B}\ \text { Firm A } \begin{array}{|l|l|l|} \hline & \text { Advertise } & \begin{array}{l} \text { Do Not } \ \text { Advertise } \end{array} \ \hline \text { Advertise } & \$ 0, \$ 0 & \$ 175, \$ 10 \ \hline \begin{array}{l} \text { Do Not } \ \text { Advertise } \end{array} & \$ 10, \$ 175 & \$ 125, \$ 125\ \hline \end{array}\end{array}$ Suppose there is a 20 percent chance that the advertising game depicted in Figure 10-17 will end next period.The collusive agreement {(not advertise,not advertise)} is: A) sustainable since $175 < $625. B) unsustainable since $175 < $625. C) sustainable since $10 > $50. D) unsustainable since $10 > $50.

Quizplus · Accepted Answer

If a collusive agreement is reached to not advertise, then both firms will earn a profit of $625 next period with a 20 percent probability.

If Firm A deviates and decides to advertise, it will earn a profit of $175 with a 20 percent probability and $125 with an 80 percent probability, resulting in an expected value of:
0.2 * $175 + 0.8 * $125 = $135

If Firm B deviates and decides to advertise, it will earn a profit of $175 with a 20 percent probability and $125 with an 80 percent probability, resulting in an expected value of:
0.2 * $175 + 0.8 * $125 = $135

Therefore, both firms have no incentive to deviate from the collusive agreement and it is sustainable.

Refer to the Normal-Form Game of Advertising Shown Below Suppose There Is a 20 Percent Chance That the Advertising