Temple University Department of Economics

Temple University
Department of Economics

Economics 92
Principles of Microeconomics, Honors

Homework 4
First Games

Answer Key

Cigarette Advertising was done on TV prior to January 1, 1971. This first game answers the question of the willingness of the cigarette manufacturers to agree to the ban. Suppose that there are two manufacturers: Philip-Morris and Lorillard. Their profits when they advertise and when they do not are shown in the following table:

		Philip-Morris
		Don't Advertise	Advertise
Lorillard	Don't advertise	50, 50	20, 60
Lorillard	Advertise	60, 20	27, 27

Name Key

1. Suppose that Lorillard chooses Don't Advertise. What is Philip-Morris' payoff if they also choose Don't Advertise? 50

2. Suppose that Lorillard chooses Advertise. What is Philip-Morris' payoff if they choose Don't Advertise? 20

3. Given the payoffs as shown, would Philip-Morris ever choose "Don't Advertise"? Yes No

4. Given the payoffs as shown, would Lorillard ever choose Don't Advertise? Yes No

You can see that Philip-Morris and Lorillard will both advertise, although they would prefer that they both don't advertise. There is a coordination problem in this game. The agreement with the government to suspend TV advertising provided the coordination mechanism that was previously lacking. You should be able to generalize this situation to other business scenarios, in particular brewing.

Suppose that the payoff matrix is changed just a little to the following:

		Philip-Morris
		Don't Advertise	Advertise
Lorillard	Don't advertise	50, 50	20, 50
Lorillard	Advertise	60, 20	27, 27

5. Suppose that Lorillard chooses Don't Advertise. What is Philip-Morris' payoff if they also choose Don't Advertise? 50

6. Suppose that Lorillard chooses Don't Advertise. What is Philip-Morris' payoff if they choose Advertise? 50

7. In response to a play of Don't Advertise by Lorillard, can we say with certainty what strategy will be played by Philip-Morris? Yes No

8. Does the solution to the game change between the two versions presented above? Yes No

Suppose that the payoff matrix is changed just a little bit more:

		Philip-Morris
		Don't Advertise	Advertise
Lorillard	Don't advertise	50, 50	20, 50
Lorillard	Advertise	50, 20	27, 27

9. What is Philip-Morris' best response to a play of Don't Advertise by Lorillard?
or Either Don't Advertise or Advertise

10. What is Philip Morris' best response to a play of Advertise by Lorillard?
or They only play Advertise

11. What is Lorillard's best response to a play of Don't Advertise by Philip-Morris?
or Either Don't Advertise or Advertise

12. What is Lorillard's best response to a play of Advertise by Philip-Morris?
or They only play Advertise

13. For which strategy pairs is there an overlap in best responses by the two players?

Overlap	Strategy played by Philip-Morris		Strategy played by Lorillard
1	Don't Adv	and	Don't Adv
2	Adv	and	Adv
3		and
4		and

14. How many equilibria to the game are there? Two

15. In this last version of the game is there still a coordination problem? Yes No