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Economics

Suppose Verizon and AT&T Wireless spend enormous sums of money every year to promote their wireless services, hoping to steal customers from each other. Furthermore, assume each year they have to decide whether or not they should spend more money on advertising. If neither firm advertises, each of them will earn $12 million. If both advertise, each will earn $7 million in profit. If one firm advertises and the other does not, the firm with the promotions will earn a profit of $15 million and the other firm will earn a mere $2 million. Use a payoff matrix to present this problem. For the problem above:

a) If the probability of a Verizon decision to advertise is 80 percent, what is the expected payoff to AT&Ts decision to advertise?

b) If the probability of Verizon not advertising even though AT&T does not is 10 percent, what is expected payoff to AT&Ts decision to not to advertise?

c) What should AT&T do?

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M9441484

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