Question 2. (18 points) Suppose there are two pharmaceutical companies

Question 2. {13 points] Suppose there are two pharmaceutical companies, effective [E] and ineffective {I}, that produce a cold medicine. The buyers of the medicine cannot distinguish between the two and decide which medicine to buy based on the advertisements on TV. Specically, the buyers buy a medicine only if they see advertisements for that medicine on TV. Regardless of whether the other company advertises, when a company advertises, the company makes $100 million of business if it is company E and only $30 million of business if it is company I. If the buyers decide not to buy a medicine, the company producing that medicine, regardless whether it's E or I, will make only $31} million of business by attaining the medicine to some other country. [Exporting is not an option when selling to the domestic customers} Suppose the total production cost of the medicine is $10 million for both companies. Suppose the government owns the only TV station in the county and would like to make sure that advertisements work as a signal of the true quality to the buyers and as a result, the buyers in the country buy medicines produced only by E. That is, o_nly company E would advertise and sell in the domestic market, whereas company I would not advertise and export. In order to do that, the government controls the total cost of' advertising {$C) and can choose any value of C it wants; C is measured in million dollar. Each company's payoff is the amount of business it makes minus the pmduction cost and the cost of advertising, given it advertises. {a} {11 points) Find out what value of C would ensure that only E advertisea (b) (7 points) If the government sets C = $10 million, what happens? Will the buyers be able to distinguish between E and I ? Explain