Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Both firms will achieve their highest possible profits.
B
One firm may gain a competitive advantage while the other suffers losses.
C
Both firms will end up at Nash equilibrium.
D
Neither firm will change their strategy.
Understanding the Answer
Let's break down why this is correct
Answer
In a competitive market, if both Firm A and Firm B decide to advertise, they are likely to increase their overall payoffs, but the benefits may not be as high as they hope. When both firms advertise, they attract more customers, which can lead to higher sales for both. However, the competition means that they may end up spending a lot on advertising without significantly increasing their market share compared to each other. For example, if both firms spend money on ads to promote their products, they might gain new customers, but those customers might just switch from one firm to the other rather than bringing in entirely new business. Ultimately, while advertising can boost sales, the payoff for each firm may be diminished due to their competing efforts.
Detailed Explanation
When both firms advertise, they compete for customers. Other options are incorrect because It's a common belief that advertising always leads to higher profits for both; Some think that both firms will settle into a stable situation where neither changes.
Key Concepts
Nash Equilibrium
Dominant Strategy
Oligopoly
Topic
Game Theory Strategies
Difficulty
easy level question
Cognitive Level
understand
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