Answer:
Step-by-step explanation:
From the given information:
The price reduction = 98% = 0.98
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.
