5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

3. Two rival firms operate in an oligopoly and, once
   a year, choose an advertising strategy. The firms
   can choose between an expensive television and
   radio advertising campaign (costly ads) or an inex-
   pensive direct-mail advertising campaign (cheap
   ads). Television and radio cost more but reach
   more potential customers. Each firm decides their
   advertising strategy independently on January 1,
   2007, and, once chosen, cannot alter the decision
   until January 1, 2008. The table below summa-
   rizes the profits each firm would earn given their
   own, and their rival’s strategy. Use this matrix to
   answer the following questions.

FIRM 2
Costly Ads Cheap Ads
Costly Ads Firm 1: $100 Firm 1: $250
FIRM 1 Firm 2: $100 Firm 2: $75

Cheap Ads Firm 1: $75 Firm 1: $200

Firm 2: $250 Firm 2: $200

(A) Suppose Firm 1 chooses Costly Adsand Firm

2 chooses Cheap Ads.

i. Identify the profit for Firm 1.

ii. Identify the profit for Firm 2.

(B) It is now January 1, 2007, and each firm

must independently make the advertising

strategy decision. Is there a dominant strat-

egy in this game? Explain how you know.

(C) If each firm chooses the advertising strategy

independently without collusion, what is the

outcome of this game?

(D) Is the outcome of this game an example of a

“prisoners’ dilemma”? Explain your answer.

202 › Step 5. Build Your Test-Taking Confidence

› Free-Response Grading Rubric

Note:Based on my experience, these point allocations roughly approximate the weighting

on similar questions on the AP examinations. Be aware that every year the point allocations

differ and partial credit is awarded differently.

Question 1 (11 points)

Part (A): 2 points

These points are graphing points. A perfect response shows the salmon supply curve shift-

ing to the left, increasing the price, and decreasing equilibrium quantity in the market.

These prices and quantities must be labeled.

Part (B): 5 points

This part of the question asks you to explain something, which means a graph is not

required. However, a graph may assist your explanations.

1 point: Explain that higher salmon prices increase the demand for tuna, a substitute.

Quantity

Price $

S 2

P 1

P 2

D 1

S 1

Q 2 Q 1

E 1

E 2

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