Complete Question:
There are two plant nurseries in a small town. They are called Tumbleweed and Native Roots. If neither advertises, Tumbleweed makes $80,000 a month in profits and Native Roots makes $95,000. Advertising would cost each firm $20,000 a month. If only one firm advertises, that firm increases sales by $50,000 a month whereas the non-advertising firm loses out. If Tumbleweed doesn't advertise but Native Roots does, Tumbleweed loses $30.000 a month. If Native Roots doesn't advertise but Tumbleweed does, it loses $35,000 a month. If both advertise, they increase revenue by $15,000 each. Insofar as they grow their products from the ground, they don't have any increased costs when they have increased sales (that is, their marginal cost of production is $0). 7th attempt Part 1 (2 points) See Hint What is the amount of profit Tumbleweed makes when both advertise? $ How much profit does Native Roots make when both advertise? $ See Hint Part 2 (1 point) What outcome is predicted (that is, the Nash equilibrium) for these two firms, given the figures above? Choose one: • A. Both firms advertise. B. Tumbleweed advertises, but Native Roots doesn't. C. Native Roots advertises, but Tumbleweed doesn't. D. Neither firm advertises.
Answer:
Tumbleweed and Native Roots
Part 1:
a. The amount of profit that Tumbleweed makes when both advertise is:
= $95,000 ($80,000 + $15,000)
b. The amount of profit that Native Roots makes when both advertise is:
= $110,000 ($95,000 + $15,000)
Part 2:
The predicted outcome (that is, the Nash equilibrium) for these two firms, given the figures above is:
A. Both firms advertise.
Explanation:
a) Data and Calculations:
Tumbleweed Native Roots
Profits without advertisement $80,000 $95,000
Advertising cost per month 20,000 20,000
Loss without advertisement -30,000 -35,000
Gain with advertisement 50,000 50,000
Gain if both firms advertise 15,000 15,000
