Question
. (9) Suppose you manage a large company's marketing department and are responsible for deciding how much to spend on advertising. Your team of analysts
. (9) Suppose you manage a large company's marketing department and are responsible for deciding how much to spend on advertising. Your team of analysts estimate that if you spend $5 million on advertising, your firm would generate $4 million in additional revenue for the company. Therefore, your company would expect to lose $1 million in profit if you spent the $5 million on advertising.
a) (2) Explain why it could still be worthwhile to spend the $5 million on advertising, even though you expect in advance that your company would lose $1 million in profit?
b) (7) Depict this situation with a game theory payoff matrix. Your company (A) and a major competitor (B) have two potential strategies: to advertise or to not advertise. The payoffs in each cell represent the change in firm profits from advertising.Create payoffs in each cell such that the Nash equilibrium is that both firms advertise despite having a higher profit if neither firm advertised.
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