Question

George and Jerry are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $3,000. If they both advertise on radio, each will earn a profit of $5,000. If neither advertises at all, each will earn a profit of $10,000. If one advertises on TV and the other advertises on radio, then the one advertising on TV will earn $4,000 and the other will earn $2,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $8,000 and the other will earn $5,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $9,000 and the other will earn $6,000. If both follow their dominant strategy, then George will

Answer 1

Answer:

Not advertise and earn $10,000

Explanation:

In the scenario, we are told that ''If neither advertises at all, each will earn a profit of $10,000.''

In this kind of duopoly situation where they wish to both follow their dominant strategy, the best outcome for both players is to maximize their outcome and profits. Hence they will both do what is best for themselves.

Looking at the entire scenario, that is the option that maximizes their outcome from advertising as all other options earn them amounts that are less than $10,000. Hence the logical thing to do is not to advertise at all.

Answer 2

Answer: c. not advertise and earn $10,000.

Explanation:

According to GAME THEORY, the Dominant Strategy is one that if taken by an individual, results in the optimal move regardless of how the other player reacts.

In this scenario, NOT ADVERTISING is the Dominant Strategy. This is because if NONE of them advertise, they both make $10,000. If ONLY one advertises on TV and the other does not Advertise, the latter makes $5,000 regardless. If ONLY one advertises on Radio and the other does not Advertise, the latter makes $6,000. Thus, not advertising provides the Optimal scenario REGARDLESS of what the other does.

Let's say one decides to advertise on radio for instance. If that happens and the other also advertises, they will both earn $5,000. However, if one advertises on the radio and the other on TV, the former would only make $2,000. This figure is less than any figure from the NOT ADVERTISE strategy. So it is not the Dominant Strategy.

Now if both of them decide to follow their Dominant Strategy, they will both not Advertise and if both of them decide to abstain from advertising, it is stated that they will each make $10,000.

George will therefore make $10,000.