Question

To advertise or not to advertise

Suppose that two firms, Hatte Latte and Bean Bruver, are the only sellers of espresso 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:
Bean Bruuer
Advertise Doesn't Advertise
Hatte Latte Advertise 9, 9 15, 3
Doesn't Advertise 3, 15 11, 11

For example, the lower left cell of the matrix shows that if Bean Bruver advertises and Hatte Latte does not advertise, Bean Bruver will make a profit of $15 million, and Hatte Latte will make a profit of $3 million. Assume this is a simultaneous game and that Hatte Latte and Bean Bruuer are both profit-maximizing firms.
If Hatte Latte chooses to advertise, it will earn a profit of $_____ militon if Bean Bruver advertises and a profit of $____ million if Bean Bruver does not advertise.

Answer 1

If Hatte Latte chooses to advertise, it will earn a profit of $ 9 militon if Bean Bruver advertises and a profit of $15 million if Bean Bruver does not advertise.

If Hatte Latte chooses to advertise:

If Bean Bruver also advertises, Hatte Latte will earn a profit of $9 million (as shown in the top left cell of the payoff matrix).

If Bean Bruver does not advertise, Hatte Latte will earn a profit of $15 million (as shown in the bottom left cell of the payoff matrix).

Therefore, if Hatte Latte chooses to advertise, it will earn a profit of $9 million if Bean Bruver advertises and a profit of $15 million if Bean Bruver does not advertise.