Consider two cigarette companies, PM Inc. and Brown Inc. If neither company adve
ID: 1155147 • Letter: C
Question
Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market. If they both advertise, they again split the market, but profits are lower, since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other.Now suppose the government passes a law prohibiting cigarette advertising on television. If cigarette companies are profit maximizers, what is most likely to happen? A. Neither company will oppose the ban on advertising. B. Both companies will retaliate with black-market operations. C. Brown Inc. will sue the government on grounds that the ban constitutes a civil rights violation. D. Both companies will sue the government on grounds that the ban constitutes a civil rights violation. Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market. If they both advertise, they again split the market, but profits are lower, since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other.
Now suppose the government passes a law prohibiting cigarette advertising on television. If cigarette companies are profit maximizers, what is most likely to happen? A. Neither company will oppose the ban on advertising. B. Both companies will retaliate with black-market operations. C. Brown Inc. will sue the government on grounds that the ban constitutes a civil rights violation. D. Both companies will sue the government on grounds that the ban constitutes a civil rights violation.
Explanation / Answer
"A"
Neither company will oppose the ban on advertisement because without advertisement they will be splitting the market. iF advertisement is allowed they both will have to or the non-advertising company will lose. This government ban ensured that none of the companies advertise and they both make a larger profit.