A theater and restaurant are in a process of choosing a location. If they both o

Question

A theater and restaurant are in a process of choosing a location. If they both open at location A, they both earn 10. If both open at location B, they both earn 8. If they open at different, they both earn 2.

(a) Write the payoff matrix for this interaction in this format.
Theater

AB

A? ?

restaurant

B? ?

(b) What is the most likely outcome in this situation (location, earnings). Explain Briefly.

(c) Suppose the payoffs are instead as follows If they both open at location A, theater earns 12 while the restaurnat earns 8. If both open at B, the theater earns 8 and the restaurant earns 12. IF they open at different locations, they both earn 2. Write the payoff matrix in the same format as (a).

(d) You are the restaurant and commit to a location first. Based on the payoff structure in (c) where should you choose to locate? Why? What will be the final outcome (location of each, payoff to each).

Explanation / Answer

A B A 10 2 B 2 8 (b)They both open in Location A and each earn 10. It is the best case for both. (c) 12,8 2,2 2,2 8,12 (d) The restaurant will choose location B because they know the theater will then be forced to choose location B as well. B,B and 8,12

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