Question

a Two computer firms, A and B, are planning to market network systems for office information management. Each firm can develop either a fast, high-quality system (High), or a slower, low-quality system (Low). Market research indicates that the resulting profit to each firm for the alternative strategies are given by the payoff matrix to the right Firme Firm B If both firms make their decisions at the same time and follow maximin (low-risk) strategies, what will the outcome be? High Low The outcome if both firms follow maximin strategies is for 55 High Firm A O A. Firm A to choose high and Firm B to choose high. OB. Firm A to choose high and Firm B to choose low. O C. Firm A to choose low and Firm B to choose high OD. Firm A to choose low and Firm B to choose low. O E. none of the above. Low Suppose that both firms try to maximize profit, but that Firm A has a head start in planning and can commit first. Now what will be the outcome? The outcome if Firm A has a head start is for O A. Firm A to first choose high and then Firm B to choose high. OB. Firm A to first choose low and then Firm B to choose low. O C. Firm A to first choose high and then Firm B to choose low. O D. Firm A to first choose low and then Firm B to choose high. O E. none of the above. What will be the outcome if Firm B has the head start in planning and can commit first? The outcome if Firm B has a head start is for

Answer 1

1. In maximin strategy, a firm chooses worst option for each of its own moves and then chooses the best return out of the worst options. If A chooses H then worst outcome will be when B also chooses H, giving a return of 35. If A chooses L, worst outcome would be when B also chooses L, giving a return of 10. Hence, A will choose H.

If B chooses H, worst outcome is A choosing H, giving B 25. if B chooses L, worst outcome is A also choosing L, giving B 5. So B will choose H.

So the correct answer is A- both firms choose High.

2. If firm A moves first, it will choose H. The reason is that A knows that then B will choose L because B gets 55 return in it, which in turn will give 80 to A.

If firm B moves first, it will choose H because by the same reasoning as above, A will choose L and B will end up getting 65.

So the answer again is A-both firms choose H

3. Both firms will be able to spend only as much for moving first as much advantage they get when moving first. If A moves first, it gets 80, while if it moves second, it gets 65. The difference is 15. This is how much A will pay to move first.

If B moves first, it gets 65 while if it moves second, it gets 55, so it will be willing to pay 10 to move first.

So Firm A would spend the most and it will spend 15.

Firm B would spend 0 dollars as it is unwilling to outspend A, so the correct option is A.