The following is a payoff matrix showing profit in millions of dollars when two
ID: 1117117 • Letter: T
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):
a)In the first round of strategy elimination, which ad budget would the companies exclude?
b)After the first round of elimination, would either company make a second-round elimination?
c)What would be the likely outcome of this simultaneous advertising decision (i.e. what ad budget would each company end up choosing)?
Blank for Formatting Pizza Hut Advertising Budget: $1 mill Pizza Hut Advertising Budget: $2 mill Pizza Hut Advertising Budget: $3 mill Papa John's Advertising Budget: $1 mill $30/$20 $40/$25 $40/$15 Papa John's Advertising Budget: $2 mill 35/25 30/30 45/20 Papa John's Advertising Budget: $3 mill 20/40 25/35 30/25 a. Papa Johns would eliminate $1 mill; Pizza Hut would eliminate $2 mill b. Papa Johns would eliminate $3 mill, Pizza Hut would eliminate $3 mill. c. Papa Johns would eliminate $2 mill, Pizza Hut would eliminate $3 mill. d. Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $1 mill.Explanation / Answer
a) Papa Johns would eliminate $ 3 mill; Pizza Hut would eliminate $ 3 mill.
Papa Johns would eliminate $ 3 mill because payoff of $ 3 mill is least as compared to other two. Similarly, Pizza Hut eliminate $ 3 mill.
b) Pap Johns would not eliminate either; Pizza hut would eliminate $ 1 mill.
Pizza hut eliminates $ 1 mill because payoff of $ 1 mill is less than payoff of $ 2 mill while taking any decision.
c) Papa Johns would pick $ 1 mill; Pizza Hut would pick $ 2 mill.
Pizza Hut will always choose $ 2 mill because it has dominant strategy of choosing $ 2 mill. When Pizza Hut chooses $ 2 mill then best response of Papa Johns is to choose $ 1 mill.
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