Dons Graded Homework Chapter 112 B Table 1212 The payoffs a

Dons : Graded Homework: Chapter 112 B. (Table 12.12) The payoffs are profts m milions of dollars Firm 2 IStrategy Al Strategy IB Firm 1 Strategy 10 Strategy B 20 20 If Firm 1 follows a maximin strategy the outcome of this game is o 1,10) .3t2o, 20).

Solution

Option A (-1, 10) is the outcome if this game.

In a maximin strategy game in which a player or organization maximizes the probability of minimum profit so that the degree of risk can be reduced.

Thus, the option A will be the outcome.

Let us first analyze the outcome of firm 2. If the firm 2 uses stategy B, then the minimum gain posible would be 10 (because 10<20). Similarly, if firm 2 uses strategy A, then the minimum gain possible would be 8 (because 8<15). Thus, the table shows that the minimum profit of firm 2 will be 10 when it uses strategy 2 and 8 when it uses strategy 1.

Similar analysis shows that the minimum profit of firm 1 will be -20 when it uses strategy 2 and -1 when it uses strategy 1.

Now both the firms, 1 and 2, would find out the strategy that would yield them maximum of the minimum profit.

The maximum of the minimum profit for firm 1 will be -1 and for firm 2 will be 10. Thus, firm 1 will choose strategy 1 and firm 2 will choose strategy 2.