P-TV and QRS-TV are trying to decide whether to air a sitcom or a reality show in a given time slot. Viewers like both sitcoms and reality shows, but sitcoms are more expensive to produce than reality shows since real actors need to be hired. QRS-TV makes its decision first, and then P-TV observes that choice before making its decision. Both stations know all of the information in the decision tree below. Suppose QRS-TV enters into an agreement with P-TV that gives QRS-TV the exclusive right to air a reality show during this time slot. QRS-TV would have to pay P-TV ________ in order to persuade P-TV to enter into this agreement.
A)at least $10 million
B)nothing
C)at least $5 million
D)more than zero, but less than $5 million

Question

P-TV and QRS-TV are trying to decide whether to air a sitcom or a reality show in a given time slot. Viewers like both sitcoms and reality shows, but sitcoms are more expensive to produce than reality shows since real actors need to be hired. QRS-TV makes its decision first, and then P-TV observes that choice before making its decision. Both stations know all of the information in the decision tree below.  Suppose QRS-TV enters into an agreement with P-TV that gives QRS-TV the exclusive right to air a reality show during this time slot. QRS-TV would have to pay P-TV ________ in order to persuade P-TV to enter into this agreement.
A)at least $10 million 
B)nothing 
C)at least $5 million 
D)more than zero, but less than $5 million

Quizplus · Accepted Answer

In the equilibrium of this game, both air reality shows and earn $10 million each. If QRS-TV has the exclusive right to air a reality show, then P-TV will only earn $5 million. So, QRS-TV will have to pay P-TV at least $5 million to enter into this arrangement.

P-TV and QRS-TV Are Trying to Decide Whether to Air