Suppose the flour division at General Mills is deciding whether to risk a price
ID: 1108999 • Letter: S
Question
Suppose the flour division at General Mills is deciding whether to risk a price war with Pillsbury by lower its prices. If General Mills lets prices remain the same, then General Mills will earn $8 million in profits and Pillsbury will earn $7 million. If General Mills lowers prices, Pillsbury will observe the move, then decide whether to respond with its own price cut and keep its prices constant. If General Mills lowers prices and Pillsbury keeps prices constant, then General Mills will earn $10 million and Pillsbury will earn $2 million. If General Mills lowers prices and Pillsbury responds with its own price cut, then General Mills will earn $5 million and Pillsbury will earn $4 million. What is the equilibrium found by backward induction?
General Mills lets prices remain the same.
General Mills lowers prices, and Pillsbury responds with its own price cut.
General Mills lowers prices, and Pillsbury keeps its prices constant.
Backward induction is impossible in this game.
A:General Mills lets prices remain the same.
B:General Mills lowers prices, and Pillsbury responds with its own price cut.
C:General Mills lowers prices, and Pillsbury keeps its prices constant.
D:Backward induction is impossible in this game.
Explanation / Answer
Answer - In this game we can see that 'Pillsbury is losing its profit if respond to price cur by General Mills. But Pillsbury will make $7 million profit if it lowers price. In the case General Mill will keep their prices unchanged. GM earns $8 million and Pillsbury would earn $7 million. The correct and profitable strategy would be ''General Mills lets prices remain the same.
Option A is the correct answer.
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