1. Two firms in the same industry are deciding about how much advertising to purchase. The effectiveness of Firm X's advertising is affected by Firm Y's advertising and vice versa. If both firms choose to advertise a lot, the advertising effect on their demand cancels out, and they lose profit from the cost of advertising (change in profit is -3 for both). They would be better off if they both advertised only a little (change in profit is +1 for both). If Firm Y did not advertise heavily (change in profit is +1), then Firm X benefits greatly by advertising (change in profit is +5), and vice versa.

a. Write down a payoff matrix for this game.

b. Do either of these firms have a dominant strategy? If so, what is it?

c. What do you think the equilibrium is? Why?

d. Is/are the equilibrium(s) pareto efficient? Why or why not?

e. If this were a repeated game, would the equilibrium be different? why?