The following is a payoff matrix showing profit in millions of dollars when two

Question

The following is a payoff matrix showing profit in millions of dollars when two companies simultaneously decide on various advertising budgets ($1 million, $2 million, or $3 million) Pizza Hut $1 mil $2 mil $3 mill 1 mil$30 / $20 40 2540/15 Papa Johns 2 mill 35 25 30 30 45/ 20 $3 mi20/40 25/3530 25 In the first round of strategy elimination (when all three possible budgets are under consideration) which ad budget would the companies exclude? Select one: a. Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $1 mill b. Papa Johns would eliminate $1 mill; Pizza Hut would eliminate $2 mill c. Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $3 mill d. Papa Johns would eliminate $2 mill; Pizza Hut would eliminate $3 mill After the first round of elimination (previous question), would either company make a second-round elimination? Select one: a. Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $2 mill b. Papa Johns would not eliminate either; Pizza Hut would eliminate $1 mill c. Neither company would eliminate in the second round d. Papa Johns eliminates $2 mill; Pizza Hut eliminates $2 mill hat would be the likely outcome of this simultaneous advertising decision (i.e. what ad budget would each company end up choosing)? Select one: a. Papa Johns would pick $1 mill; Pizza Hut would pick $2 mill b. Both would choose $1 mill c. Papa Johns would choose $1 mill; Pizza Hut would choose $3 mill d. Papa Johns would choose $3 mill; Pizza Hut would choose $1 mill

Explanation / Answer

1. Correct option: (c) PJ will eliminate $3 ; PH will eliminate $3

Reason: Choosing $3 is the least favored strategy for both players. It is the least likely or least dominant strategy for both.

2. Correct option: (b) PJ would eliminate neither ; PH would eliminate $1

Reason: PJ has no dominant strategy while PH has dominant strategy of $2, making it feasible to eliminate $1 for PH

3. Correct option: (a) PJ will choose $1 ; PH will choose $2

Reason: When $1 for PH is eliminated, PJ will chose to select $1 when PH chooses $2

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