Below is a profit pay-off matrix for two oligopoly firms: Calvin Inc.and Hobbs Ltd.Calvin's profits are shown in the upper portion of each box and Hobb's are in the lower portion.

-Refer to the information above to answer this question.Which of the following statements is correct if no agreement between Calvin and Hobbs is in place and each is considering what to do in terms of its advertising budget?

Question

Below is a profit pay-off matrix for two oligopoly firms: Calvin Inc.and Hobbs Ltd.Calvin's profits are shown in the upper portion of each box and Hobb's are in the lower portion.
 
-Refer to the information above to answer this question.Which of the following statements is correct if no agreement between Calvin and Hobbs is in place and each is considering what to do in terms of its advertising budget?

Quizplus · Accepted Answer

If Calvin adopts a high advertising budget, his profits will be 8 instead of 6 if Hobbs also adopts a high advertising budget. If Hobbs adopts a low advertising budget, his profits will be 10 instead of 7 if Calvin also adopts a low advertising budget. Therefore, both firms have an incentive to adopt the same advertising budget, which is high in this case. Therefore, option B is the correct answer.

Below Is a Profit Pay-Off Matrix for Two Oligopoly Firms