Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Drug Ads: A pharmaceutical company {player 1} introduces a new cold medicine. The medicine may either be highly eective {H} or have little effect (L).
Drug Ads: A pharmaceutical company {player 1} introduces a new cold medicine. The medicine may either be highly eective {H} or have little effect (L). The company knows the effectiveness of the drug, but a repre- sentative consumer (player 2) knows only that the prior probability that it is highly effective is i. The company can choose either to advertise the drug excessively {A}. at a cost c s- D. or not to advertise (N l, which costs noth- ing. The representative consumer decides whether or not to buy the product after observing whether the company advertised the drug. The net payoff to the representative consumer from buying the drug is I if it is highly effec- tive and I if it has little effect. and his payoff from not buying. the drug is D. If the drug is highly effective then if consumers boy the drug once they will learn of its efcacy and buy it many more times, in which case the com- pany earns a high payoff equal to R 2:- c. If instead consumers learn that the drug has little effect then the company will sell the drug to them only once. and the company's returns are equal to r 2:- 0. It\" the representative consumer does not buy the drug then the revenue of the company is It]. Assume that R :3- c s r 3. D. 3.. Write down the extensiveform game here
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started