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Rudik [331]
3 years ago
13

Refer to the following formula for expected payoff:

Mathematics
1 answer:
emmasim [6.3K]3 years ago
4 0

Answer:

Step-by-step explanation:

From the given information:

The price reduction = 98% = 0.98

Then \  the \  expected  \ payoff  \ =  \[(probability \  of \ matching \ price \  reduction  \ *  \ size \ of \  loss  \ from \  price \  cuts \ ) \  +  \ ( \ probability \  o f \  rivals\  not \  matching  \ * \  gain \ from \  price \  cuts  )]

where;

P(rival not matching ) = (100 - 98)% = 2%

P(rival not matching ) = 0.02

The expected payoff = [(0.98 * -800) + (0.02*50000)]

The expected payoff = [( -784+ 1000)]

The expected payoff = 216

(b) Probability of rivals reducing price = 5%

= 5/100

= 0.05

∴

Probability of rivals reducing price = 1 - 0.05 = 0.95

The expected payoff = (0.05 * -6000) + (0.95 *0)

The expected payoff = -300 + 0

The expected payoff = -300

(c) Yes.

Based on answers (a) and (b), the firm should cut the price.

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