60B- What is the Nash equilibrium for this game and identify the profit each player gets at this solution 5 m Social InteractionsConsider two companies who advertise to attract the same customers. If neither company advertises the companies split the market. If both advertise they also split the market, but profits arelower, since each company must spend on advertising. But if one company advertises and the other does not, the one that advertises attracts customers from the other. The game isrepresented in the following table:Firm BAdvertiseDon't AdvertiseAdvertiseFirm A gets $3 MFirm A gets $5 MFirm AFirm B gets $3 MFirm B gets $2 MDon't AdvertiseFirm A get $2 MFirm A gets $4 MFirm B gets $5 MFirm B gets $4 M

Answered: Social Interactions Consider two…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

60B- What is the Nash equilibrium for this game and identify the profit each player gets at this solution 5 m

Social Interactions
Consider two companies who advertise to attract the same customers. If neither company advertises the companies split the market. If both advertise they also split the market, but profits are
lower, since each company must spend on advertising. But if one company advertises and the other does not, the one that advertises attracts customers from the other. The game is
represented in the following table:
Firm B
Advertise
Don't Advertise
Advertise
Firm A gets $3 M
Firm A gets $5 M
Firm A
Firm B gets $3 M
Firm B gets $2 M
Don't Advertise
Firm A get $2 M
Firm A gets $4 M
Firm B gets $5 M
Firm B gets $4 M

Expert Solution

Step 1

Nash equilibrium occurs when there is no incentive for each player to deviate from the current level of strategy.

For finding Nash equilibrium, underline the highest payoff of firm A when frim B advertises, that is comparing vertically, and underline the highest payoff when firm B Don't advertise.

For firm B, underline the highest payoff when firm firm A advertise, that is comparing horizontally, and underline the highest payoff when firm A don't advertise.

Encircle the one with both payoffs underlined.