Suppose that Fizzo and Pop Hop are the only two firms that s

Suppose that Fizzo and Pop Hop are the only two firms that sell orange soda. The following payoff matrix shows the profits (in millions of dollars) each company will earn depending on whether it advertises. For example, the upper right cell shows that if Fizzo advertises and Pop Hop doesn\'t advertise, Fizzo will make a profit of $8 million and Pop Hop will make a profit of $3 milion Both Fizzo and Pop Hop are profit-maximizing firms Pop Hop 5, 5 3, 8 Advertise Don\'t Advertise Advertise 8, 3 Fizzo Don\'t Advertise If Fizzo decides to advertise, it will earn a profit of if Pop Hop advertises and a profit of if Pop Hop does not advertise. If Fizzo decides not to advertise, it will earn a profit of if Pop Hop advertises and a profit of if Pop Hop does not advertise. If Pop Hop advertises, Fizzo makes a higher profit if it chooses If Pop Hop doesn\'t advertise, Fizzo makes a higher profit if it chooses

Solution

a) $ 5 million

If Pop Hop advertises then fizzo can either earn 5 million or 3 million by choosing Advertise or Don\'t advertise respectively.

b) $ 8 million

c) $ 3 million

d) $ 7 million

e) Advertises

f) Advertise

When Pop Hop doesn\'t advertise then Fizzo makes higher profit of $ 8 million by advertising.

g) Both firms will choose to advertise.

This maximises the payoff of both the firms.

h) Both firms will choose not to advertise.

When both firms don\'t advertise then payoff of each firm will be $ 7 million which is greater than payoff of $ 5 million when both advertises.

i) The game were repeated for an indefinite period of time.