The following is a payoff matrix showing profit in millions of dollars when two
ID: 1218986 • 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)?
Pizza Hut $ 1 million $ 2 million $ 3 million $ 1 million 60/55 70/60 20/65 Papa Johns $ 2 million 80/40 40/55 60/50 $ 3 million 85/35 67/45 65/55Explanation / Answer
a. Papa Johns would eliminate $2 mill; Pizza Hut would eliminate $1 mill.
It is because profit which Pizza Hut receives from doing $ 1 million advertisement is less as compared to other two advertisement profit. Similarly, Papa Johns earns less benefit or profit in $ 2 million budget.
b. Now, we are left with:
Pizza Hut
$ 2 Million $ 3 Milllion
Papa Johns $ 1 Million 70/60 20/65
$ 3 Million 67/45 65/55
Papa Johns wouldn’t eliminate either; Pizza Hut would eliminate $2 mill.
Pizza Hut earns less at $ 2 million advertising budget as compared with $ 3 million budget so it will eliminate $ 2 million. But on the other hand, Papa Johns earns more at $ 1 million when Pizza Hut chooses $2 Million while earns more at $ 3 million when Pizza Hut chooses $ 3 million. So, it wouldn't eliminate either.
c. Now, we are left with:
Pizza Hut
$ 3 Milllion
Papa Johns $ 1 Million 20/65
$ 3 Million 65/55
Both would choose $3 million because payoff of both is maximum.
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