Consider the following payoff matrix for a game in which two firms attempt to collude under the Bertrand model:
Firm B cuts Firm B colludes
Firm A cuts 6,6 24,8
Firm A colludes 8,24 12,12
Here, the possible options are to retain the collusive price (collude) or to lower the price in attempt to increase the firm's market share (cut). The payoffs are stated in terms of millions of dollars of profits earned per year. What is the Nash equilibrium for this game?
A) Both firms cut prices.
B) Both firms collude.
C) There are two Nash equilibria: A cuts and B colludes, and A colludes and B cuts.
D) There are no Nash equilibria in this game.
Question 2
We may be tempted to determine the optimal level of advertising expenditures at the point where the last dollar spent on advertising generates an additional dollar of sales revenue (i.e, the marginal revenue of advertising equals one).
In general, this rule will not allow the firm to maximize profits because it ignores the: A) price elasticity of demand.
B) marginal cost of additional sales generated by the advertising.
C) advertising-to-sales ratio.
D) fixed costs of advertising.
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