What will be their joint profits if each firm follows its dominant strategy?

The pay Show more Question 1. Two firms are considering the introduction of new brands of roller-blade skates. The pay-off matrix is as follows: Firm 2 Introduce Dont Introduce Firm 1 Introduce -8-8 501 Dont Introduce 150 22 What are the Nash equilibria of this game? Explain. Question 2. Suppose two large firms dominate the auto market in Scandinavia Fjord Motor Company and DIceler. Last year each firm spent $400 million on advertising and earned $200 million in profit. Fjord believes however that by increasing its advertising budget by $50 million it can capture enough of DIcelers market so that even after factoring in the cost of the advertising it can raise its profits by $40 million. (This assumes that DIceler does not increase its advertising efforts in which case its profits go down by $60 million.) DIceler believes the same thing that it can increase its advertising expenditures by $50 million steal some of Fjords market and increase its profits by $40 million. Here again if Fjord did nothing while Iceler increased its advertising Fjords profits would decrease by $60 million. If both firms increase their advertising by $50 million however their efforts cancel out and each firm simply loses the extra $50 million it spends on advertising. a. Construct a profit payoff matrix as viewed by Fjord and DIceler. The two advertising strategies considered by the firms are No increase and Increase by $50 million. b. Does each firm have a dominant strategy? Explain. What will be their joint profits if each firm follows its dominant strategy? c. What should these firms do to maximize their joint profits? If they cannot achieve the joint-profit maximum is it likely that they Show less

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