Answer to Question #108620 in Microeconomics for Joe

Question

3. There are 1,000,000 smokers, each buying 1 pack of smokes a week, and only 2 tobacco firms, Fillipo Morisso & Yappon Tabaca. Each firm can produce any amount at flat cost $4 per pack, and each firm sells at a price $10 per pack. Each firm can run an advertisement campaign that costs $500,000 per week. If none runs a campaign, each firm gets 500,000 buyers. If both run a campaign, each firm gets 500,000 buyers. If one firm advertises and the other one doesn’t, the advertising one gets 600,000 buyers and the one who does not advertise gets 400,000 (i.e., 100,000 buyers switch from one firm to another because of the ads but nobody quits or starts smoking due to the ads). Put everything together: costs of production, cost of advertising, and sales for every possible combination of strategies.

a. Fill the payoffs (profits, in $ million, per week, net of ad spending) in the bi-matrix: (2)


Yappon Tabaca
Ads No ads
Fillipo Ads
Morisso No ads

Answer 1

It is more profitable for firms to advertise their products