5. (8 points) Currently Sam and Carla have the only taxi services in a small tow
ID: 1121757 • Letter: 5
Question
5. (8 points) Currently Sam and Carla have the only taxi services in a small town. Both Sam and Carla are thinking about discounting their respective fares by 20% to attract more business. The possible outcomes of this game are as follows. First: Sam offers discounts, while Carla does not, which will result in Sam earning $400 in profit and Carla earning $800 in profit Second: Sam and Carla both offer discounts, which will result in Sam earning $200 in profit and Carla earning $500 in profit. Third: Sam and Carla both do not offer discounts, which will result in Sam earning $100 in profit and Carla earning $ Fourth, Carta offers discounts while Sam does not, which will resuft in Sam earming $60 in profit and Carla eaming $700 in proft. a) Please construct a payoff matrix for Sam and Carla uses the outcomes above, (You can use the Table Function in Word to create a payoff matrix.) b) Does Sam have a dominant (optimal) strategy? Please explain your answer. c) Does Carla have a dominant (optimal) strategy? Please explain your answer d) Is there an equilibrium (Nash Equilibrium) solution to this problem where we can predict the strategy of both Sam and Carla? Please explain your reasoning. e) Does this game resemble a Prisoner's Dilemma (where the outcome is inferior to the players)? Please explain your reasoning. 6. (8 points) The owner of Joe's Burgers is thinking about building a second fast food restaurant across town. The s enough money to of interest in deciding whether or not to build the new restaurant because she does borrow the money. I rate of interest? Please clearly explain your reasoning. econd restaurant would cost Joe $1 million to build. The owner, having more than not need to build the new building, states that she does not need to consider the market rate rate of ntereat Pease cloany esopan your reatornimgnt about not needing to onaider the market 2Explanation / Answer
Carla
Discount
No Discount
Sam
Discount
200,500
400,800
No Discount
60,700
100,1000
Answer A:- Pay off matrix is as above.
Answer B;- If Carla decides to give discount, in that case, Sam will also opt to give discount as this will help him to earn a profit of $200, while if Carla does not offer discount, even then Sam will prefer to give discount to earn greater payoffs of $400. As in both the cases Sam prefer to give discounts, thus Sam has a dominant strategy i.e. to discount
Answer C:- If Sam decides to give discount, in that case, Carla will opt not to give a discount as this will help her to earn a profit of $800, while if Sam does not offer discount, even then Carla will prefer to give no discount to earn greater payoffs of $1000. As in both the cases Carla prefer to give no discounts, thus Carla has a dominant strategy i.e. no discount
Answer D:- Yes, the upper right cell i.e. No discount with pay off od 400,800 represent the Nash Equilibrium as both these payoffs are selected by both Carla and Sam.
Answer 6:- The decision of the Owner is not correct one as the interest rates must be considered while making the decision irrespective of whether the money has to be borrowed or not. If the economy is having higher interest rates, then the owner can have greater profits by investing money in the economy rather than constructing the new building. This decision will help him to take the benefits of prevailing high-interest rates in the economy.
On the other hand, if the interest rates are lower than the rate of return on the building then the owner will be better off in constructing the building.
Carla
Discount
No Discount
Sam
Discount
200,500
400,800
No Discount
60,700
100,1000
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