The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month. They choose either low or high levels of advertising expenditure. They both employ a discount rate of 2.5 percent per month. Use the payoff table shown below to answer Questions .
$\begin{array} { l }
&\text {Beta's advertising }\
\text {Alpha's advertising }&\begin{array}{l|l|l|}
& \text {High }& \text { Low }\
\hline High &\mathrm{A}&\mathrm{B}\
& {\$ 7,000, \$ 3,500} &{\$ 2,000, \$ 6,500} \
\hline Low &\mathrm{C}&\mathrm{D}\&{\$ 8,000} \$ 1,000 & {\$4,000, \$ 2,000} \
\hline
\end{array}\
\end{array}$
-Beta expects punishment to last for two months after being caught . What would be the value-maximizing decision for Beta?

Question

The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month. They choose either low or high levels of advertising expenditure. They both employ a discount rate of 2.5 percent per month. Use the payoff table shown below to answer Questions .
 $\begin{array} { l  } 
 &\text {Beta's advertising  }\
 \text {Alpha's advertising }&\begin{array}{l|l|l|}
& \text {High  }& \text { Low }\
\hline High &\mathrm{A}&\mathrm{B}\
& {\$ 7,000, \$ 3,500} &{\$ 2,000, \$ 6,500} \
\hline Low &\mathrm{C}&\mathrm{D}\&{\$ 8,000}  \$ 1,000 & {\$4,000, \$ 2,000} \
\hline
\end{array}\
\end{array}$
-Beta expects punishment to last for two months after being caught . What would be the value-maximizing decision for Beta?

Quizplus · Accepted Answer

PV_{Benefits of cheating} = $3,500 + $2,000/(1.025) = $5,641 > $2,820

The Managers of Alpha and Beta Must Make Repeated Advertising