Question

Tobacco companies have often argued that they adver- ti se to attract more people who already smoke and not to persuade more people to begin smoking. Suppose there were just two cigarette manufacturers, Jones and Smith Each can either advertise or not advertise. If neither advertises, they each capture 50 percent of the market and each earns $10 million. If they both advertise, they again split the market evenly, but each spends $2 mil- lion on ads and so each earns just $8 million (remember advertising is not supposed to encourage more people to smoke). If one company advertises but the other does not, then the company that advertises attracts many of its rival's customers. As a result, the company that adver- tises earns $12 million and the company that does not earns just $6 million.

a. Show that advertising is a dominant strategy.

b. Suppose the government proposes a ban on cigarette ads. Should the two cigarette companies favor the ban or should they oppose the ban if advertising did not persuade some people to become smokers?

Answer 1

Advertising is a dominant strategy for the cigarette manufacturers in the given scenario. If the government proposes a ban on cigarette ads, the two companies would likely oppose it.

Step-by-step explanation:

To show that advertising is a dominant strategy, we need to compare the outcomes of each possible strategy combination for the two cigarette manufacturers. Let's consider the options:

1. If neither company advertises, they each earn $10 million.
2. If both companies advertise, they each earn $8 million.
3. If one company advertises and the other does not, the advertising company earns $12 million and the non-advertising company earns $6 million.

From these outcomes, it is clear that no matter what strategy the other company chooses, a company can always earn a higher profit by advertising. Therefore, advertising is a dominant strategy for both cigarette manufacturers.

If the government proposed a ban on cigarette ads, the two companies would likely oppose the ban. This is because advertising allows them to attract customers from each other and earn higher profits. Without the ability to advertise, their level of competition would decrease, and their profits would likely be impacted negatively.

Answer 2

Answer: Please see below for answer

Step-by-step explanation:

Jones

Advertise NOT to advertise

Smith Advertise 8,8 12,6

NOT to advertise 6,12 10,10

To show that advertising is a dominant strategy.

Here if smith advertises, the best option is for Jones to advertise too since Jones will be getting a high pay off of $8million. when Smithy fails to advertise, the best option is for Jones to stll advertise sinvehe will be getting a higher payoff of $12 million. The dominant strategy is for Jones to advertise.

In the same vein, if Jones advertises, the best option for smith is to advertise too since he will get a high pay off same with ones at $8million. and if Johns fails to advertise, Smith should still advertise since he will be getting a higher pay off of $12million than $6million making the dominant strategy for smith to be in favor of advertisement.

This shows that advertising is a dominant strategy as a higher payoff is guaranteed.

b) If the government places a ban on cigarette ads, both firms will receive $10 million as neither of them will be able to advertise , than when both firms advertise with a pay off of $8million. The two firms should favor the ban as they will receive a higher payoff if both do not advertise.