The following is a payoff matrix showing profit in millions of dollars when two

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):

Blank for Formatting Pizza Hut Advertising Budget: $1 mill Pizza Hut Advertising Budget: $2 mill Pizza Hut Advertising Budget: $3 mill
Papa John's Advertising Budget: $1 mill $30/$20 $40/$25 $40/$15
Papa John's Advertising Budget: $2 mill 35/25 30/30 45/20
Papa John's Advertising Budget: $3 mill 20/40 25/35 30/25

Question 9

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In the first round of strategy elimination (when all three possible budgets are under consideration), which ad budget would the companies exclude?

Select one:
a. Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $3 mill.
b. Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $1 mill.
c. Papa Johns would eliminate $2 mill; Pizza Hut would eliminate $3 mill.
d. Papa Johns would eliminate $1 mill; Pizza Hut would eliminate $2 mill.

Question 10

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After the first round of elimination (previous question), would either company make a second-round elimination?

Select one:
a. Neither company would eliminate in the second round.
b. Papa Johns eliminates $2 mill; Pizza Hut eliminates $2 mill.
c. Papa Johns would not eliminate either; Pizza Hut would eliminate $1 mill.
d. Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $2 mill.

Question 11

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What would be the likely outcome of this simultaneous advertising decision (i.e. what ad budget would each company end up choosing)?

Select one:
a. Papa Johns would choose $1 mill; Pizza Hut would choose $3 mill.
b. Both would choose $1 mill.
c. Papa Johns would pick $1 mill; Pizza Hut would pick $2 mill.
d. Papa Johns would choose $3 mill; Pizza Hut would choose $1 mill.

Explanation / Answer

Question 9

If Pizza hut chooses the advertising budget of $1 million then Papa John will choose advertising budget of $2 million as profit is highest in that case.

If Pizza hut chooses the advertising budget of $2 million then Papa John will choose advertising budget of $1 million as profit is highest in that case.

If Pizza hut chooses the advertising budget of $3 million then Papa John will choose advertising budget of $2 million as profit is highest in that case.

Thus, it can be seen that whatever be the strategy of Pizza Hut, Papa John will never choose the advertisng budget of $3 million.

If Papa John chooses the advertising budget of $1 million then Pizza Hut will choose advertising budget of $2 million as profit is highest in that case.

If Papa John chooses the advertising budget of $2 million then Pizza Hut will choose advertising budget of $2 million as profit is highest in that case.

If Papa John chooses the advertising budget of $3 million then Pizza Hut will choose advertising budget of $1 million as profit is highest in that case.

Thus, it can be seen that whatever be the strategy of Papa John, Pizza Hut will never choose the advertisng budget of $3 million.

So, in first round of strategy elimination, the companies would exclude the ad budget of $3 million.

The correct answer is the option (A).

Question 10

Now companies have two strategies - Ad budget of $1 million and Ad budget of $2 million.

If Pizza hut chooses the advertising budget of $1 million then Papa John will choose advertising budget of $2 million as profit is highest in that case.

If Pizza hut chooses the advertising budget of $2 million then Papa John will choose advertising budget of $1 million as profit is highest in that case.

It can be seen that ad budget of Papa John depends on the choice of ad budget by the Pizza Hut.

If Papa John chooses the advertising budget of $1 million then Pizza Hut will choose advertising budget of $2 million as profit is highest in that case.

If Papa John chooses the advertising budget of $2 million then Pizza Hut will choose advertising budget of $2 million as profit is highest in that case.

It can be seen that Pizza hut will never choose the ad budget of $1 million whatever be the ad budget choosen by the Papa John.

So, after first round of elimination, Pizza Hut will make the second round of elimination and it will eliminate the ad budget of $1 million while Papa John will not eliminate any of the remaining strategies.

The correct answer is the option (c).

Question 11

Pizza Hut is now left with only one strategy that is ad budget of $2 million.

If Pizza hut chooses the advertising budget of $2 million then Papa John will choose advertising budget of $1 million as profit is highest in that case.

So, the likely outcome of this simultaneous advertising decision is that Pizza Hut will choose advertising budget of $2 million while Papa John will choose the advertising budget of $1 million.

The correct answer is the option (c).

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