Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Both firms choose not to advertise, resulting in lower overall profits.
B
One firm advertises while the other does not, leading to one gaining market share.
C
Both firms choose to advertise, maximizing their individual payoffs regardless of the other's choice.
D
Both firms choose to lower prices instead of advertising, resulting in a price war.
Understanding the Answer
Let's break down why this is correct
Answer
A dominant strategy is a choice that is best for a player, no matter what the other player decides to do. In the case of two firms deciding whether to advertise, if both firms find that advertising gives them a higher profit regardless of whether the other firm advertises or not, then advertising is their dominant strategy. For example, if Firm A and Firm B both earn $10 million by advertising, but only $5 million by not advertising, each firm will choose to advertise. This means that, even if one firm decides to not advertise, the best choice for both firms remains to advertise. Therefore, in this scenario, advertising is the dominant strategy for both firms.
Detailed Explanation
When both firms choose to advertise, they each get the best possible outcome. Other options are incorrect because Choosing not to advertise may seem safe, but both firms miss out on potential profits; If one firm advertises and the other does not, only one benefits.
Key Concepts
Dominant Strategies
Game Theory
Oligopoly
Topic
Dominant Strategies in Game Theory
Difficulty
easy level question
Cognitive Level
understand
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