Determine the optimal strategy for the situation by representing it as a game and finding the saddle point. State your final answer in the terms of the original question. In an ongoing price war between Burger Haven (locally owned) and MacArches (a chain), both restaurant managers plan to change the price of a hamburger by 10¢. If they both raise their prices, there will be no change in their market shares, but if they both lower their prices, the chain's national advertising will ensure that MacArches gains 6% of the market. Again because of advertising, if Burger Haven lowers their price and MacArches raises their price, Burger Haven will gain only 3% of the market, but if Burger Haven raises their price and MacArches lowers their price, MacArches will gain 7% of the market. Use this information to decide what the managers should do. MacArches L R Burger Haven L R % % % % The saddle point is the in row and column . What should the managers do? Both restaurants should lower the price. Burger Haven should lower its prices, while MacArches raises its prices. MacArches should lower its prices, while Burger Haven raises its prices. Both restaurants should raise the price

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Determine the optimal strategy for the situation by representing it as a game and finding the saddle point. State your final answer in the terms of the original question.

In an ongoing price war between Burger Haven (locally owned) and MacArches (a chain), both restaurant managers plan to change the price of a hamburger by 10¢. If they both raise their prices, there will be no change in their market shares, but if they both lower their prices, the chain's national advertising will ensure that MacArches gains 6% of the market. Again because of advertising, if Burger Haven lowers their price and MacArches raises their price, Burger Haven will gain only 3% of the market, but if Burger Haven raises their price and MacArches lowers their price, MacArches will gain 7% of the market. Use this information to decide what the managers should do.

MacArches

L R

Burger Haven

%	%
%	%

The saddle point is the in row and column .

What should the managers do?

Both restaurants should lower the price.

Burger Haven should lower its prices, while MacArches raises its prices.

MacArches should lower its prices, while Burger Haven raises its prices.

Both restaurants should raise the price.

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