The following game tree is for two video rental companies Michael's Movies and Frank's Flicks) that are trying to determine if they should open stores in a college town.

What is the optimal strategy for Michael's Movies?
A) Michael's Movies should charge high prices when Frank's Flicks charges high prices.
B) Michael's Movies should charge high prices when Frank's Flicks charges low prices.
C) Michael's Movies should charge low prices when Frank's Flicks charges high prices.
D) Michael's Movies should charge low prices when Frank's Flicks charges low prices.
E) a and d

Question

The following game tree is for two video rental companies Michael's Movies and Frank's Flicks) that are trying to determine if they should open stores in a college town.

What is the optimal strategy for Michael's Movies?
A) Michael's Movies should charge high prices when Frank's Flicks charges high prices. 
B) Michael's Movies should charge high prices when Frank's Flicks charges low prices. 
C) Michael's Movies should charge low prices when Frank's Flicks charges high prices. 
D) Michael's Movies should charge low prices when Frank's Flicks charges low prices. 
E) a and d

Quizplus · Accepted Answer

From the game tree, we can see that if both Michael's Movies and Frank's Flicks charge high prices, they will both make a profit of $4,000 (the end node in the top right corner). However, if Michael's Movies charges high prices while Frank's Flicks charges low prices, Michael's Movies will make a profit of $7,000 while Frank's Flicks will make a profit of $3,000. Similarly, if Michael's Movies charges low prices while Frank's Flicks charges high prices, Michael's Movies will make a profit of $5,000 while Frank's Flicks will make a profit of $5,000.

Therefore, the best strategy for Michael's Movies would be to charge low prices when Frank's Flicks charges high prices, and to charge high prices when Frank's Flicks charges low prices. This corresponds to answer choice E, "a and d".

The Following Game Tree Is for Two Video Rental Companies