Question

Assume that if you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million. If you and your rival plan to be in business for 10 years, then the Nash equilibrium is:

Answer 1

Answer:

The Nash Equilibrium is for both firms not to advertise

Explanation:

the payoff matrix should be something like this:

                                                           Firm B

                                         to advertise                not to advertise

         to advertise            $4 / $4                          $1 / $5

Firm A

         not to advertise     $5 / $1                          $10 / $10

Both firms' dominant strategy is not to advertise.