Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising spending to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 13-1 shows the payoff matrix for this advertising game.

Alistair's (A) choices

Increase advertising budget Leave advertising budget as is

Baine's (B) increase advertising budget A:$30000 profit A:$10000 profit

Choice B:$30000 profit B: $50000profit

Leave advertising budget A: $50000profit A: $40000profit

as is B: $10000 profit B: $40000 profit

1)Refer to Table .Does Alistair have a dominant strategy and if so, what is it?

A) Yes, Alistair should keep its advertising budget as is.

B) There are two dominant strategies: if Baine increases its advertising budget, then Alistair's best bet is to keep its budget the same but if Baine does not increase its spending then Alistair should raise its advertising budget

C) Yes, Alistair should increase its advertising budget.

D) No, there is no dominant strategy.

2)Refer to Table Does Baine have a dominant strategy and if so, what is it?

A) Yes, Baine should increase its advertising budget.

B) Yes, Baine should keep its advertising budget as is.

C) There are two dominant strategies: if Alistair increases its advertising budget, then Baine's best bet is to keep its budget the same but if Alistair does not increase its spending then Baine should raise its advertising budget

D) No, there is no dominant strategy.

3)Refer to How are the firms in this advertising game caught in a prisoner's dilemma?

A) They are not in a prisoner's dilemma because there is one clear strategy for each.

B) They would be more profitable if they refrained from advertising but each fears that if it does not advertise, it will lose customers.

C) Since each firm is uncertain about the other's behavior, each will adopt a wait-and-see attitude which results in no increase in market share and no new customers.

D) Only the first mover is caught in a prisoner's dilemma because the second has a chance to observe and respond.