There are two plant nurseries in a small town. They are called Tumbleweed and Native Roots. If neither advertises, Tumbleweed makes $80,000 a month in profits and Native Roots makes $95,000. Advertising would cost each firm $20,000 a month. If only one firm advertises, that firm increases sales by $50,000 a month whereas the nonadvertising firm loses out. If Tumbleweed doesn't advertise but Native Roots does, Tumbleweed loses $30.000 a month. If Native Roots doesn't advertise but Tumbleweed does, it loses $35,000 a month. If both advertise, they increase revenue by $15,000 each. Insofar as they grow their products from the ground, they don't have any increased costs when they have increased sales (that is, their marginal cost of production is $0). Part 1 What is the amount of profit Tumbleweed makes when both advertise?
How much profit does Native Roots make when both advertise?
Part 2 What outcome is predicted (that is, the Nash equilibrium) for these two firms, given the figures above?
Choose one: •
A. Both firms advertise.
B. Tumbleweed advertises, but Native Roots doesn't.
C. Native Roots advertises, but Tumbleweed doesn't.
D. Neither firm advertises.

1. a. $75,000

b. $90,000

c. A. Both firms advertise.

Explanation:

1. a.  Tumbleweed profits when both advertise.

When both advertise they get an increased revenue of $15,000 however they will pay $20,000 for adverts which means they will have a net gain from advertising of -$5,000.

Tumbleweed profits = Amount when non advertises + Gain from advertising

= 80,000 + ( - 5,000)

= $75,000

b.  Native Roots profit if both advertise;

= Amount when non advertises + Gain from advertising

= 95,000 + ( 15,000 - 20,000)

= $90,000

2. A. Both firms advertise.

The Nash Equilibrium is the strategy that either of the two plant nurseries will take and not have to worry about the actions of the other nursery because this strategy provides the highest payoff regardless of their competitors actions.

Both firms advertising will be that strategy because if neither advertise, one will then advertise and the other would make losses so will then advertise as well.

The correct answer is letter "A": relatively elastic.

Explanation:

Elasticity is the characteristic certain goods and services have of experiencing changes in quantity demanded as the prices change. Price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. If the result is equal to or greater than 1, the demand is elastic.

Demand is relatively elastic when small changes in prices cause large changes in quantity demanded. This happens when the goods or services in reference have many substitutes and the cost of switching providers is low.

Thus, if a 1% change in the price of a given product changes its quantity demanded by more than 1%, the product is relatively elastic.