Given the payoff matrix in Table 25.1, if the probability of rivals matching a price reduction is 99 percent, what is the expected payoff for a price cut by Company ABC?
A) $0.
B) $5.
C) -$500.
D) -$5,000.

Question

Given the payoff matrix in Table 25.1, if the probability of rivals matching a price reduction is 99 percent, what is the expected payoff for a price cut by Company ABC?
A) $0. 
B) $5. 
C) -$500. 
D) -$5,000.

Quizplus · Accepted Answer

The expected payoff for a price cut by Company ABC can be calculated as: 
0.99(5) + 0.01(-5000) = -49.95 
Thus, the expected payoff is negative, but the least negative value is $-49.95, which occurs when ABC reduces its price by $5. Therefore, the best choice for ABC is to reduce its price by $5.

Given the Payoff Matrix in Table 25