Chapter $18$ Homework

$5.$ To advertise or not to advertise

Suppose that two firms, Frankencakes and Thinley's, are the only sellers of crepes in some hypothetical market. The following payoff matrix gives the profit $($in millions of dollars$)$ earned by each company depending on whether or not it chooses to advertise:

$\backslash$table$[[$Frankencakes$,$Thinley's,$],[$Advertise$,8,8,15,2],[$Doesn$\text{'}$t Advertise,$2,15,11,11],[,,]]$

For example, the lower left cell of the matrix shows that if Thinley's advertises and Frankencakes does not advertise, Thinley's will make a profit of $$15$ million, and Frankencakes will make a profit of $$2$ million. Assume this is a simultaneous game and that Frankencakes and Thinley's are both profitmaximizing firms.

If Frankencakes chooses to advertise, it will earn a profit of $$ million if Thinley's advertises and a profit of $$ million if Thinley's does not advertise.

If Frankencakes chooses not to advertise, it will earn a profit of $$ million if Thinley's advertises and a profit of $$ million if Thinley's does not advertise.

If Thinley's advertises, Frankencakes makes a higher profit if it chooses $$

If Thinley's doesn't advertise, Frankencakes makes a higher profit if it chooses. $$