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Unformatted text preview: can earn “low price” profit
of 6,000$ on your own in the first period and share it every period after with the other three
firms. a) Given the market interest rate of 20%, should you cooperate or defect to maximize your profit
(3 Points)?
Value of cooperation Value of defection You have a higher payoff from cooperation and hence should cooperate. b) At which interest rate would you be indifferent between cooperation or defecting (2 Points)? At an interest rate of 29%, I would be indifferent between the two options.
c) At which defection “low price” profit rate (the first period for yourself and shared every period after
with the other three firms) would you be indifferent to cooperation at an interest rate of 20% (2
Points). 3.) You are a contractor for the renovation of Warren Hall. You cannot exactly determine your
renovation cost beforehand, but you know the likelihood of different costs given by the
following costs and probabilities: 200,000$
600,000$
800,000$  25%
 50%
 25% Additionally, you can offer different prices to the university for the renovation and accordingly
face a probability of the school accepting your offer:
600,000$
1,200,000$
4,000,000$  80%
 50%
 20% a) Draw the decision tree for the problem outlined above. Show all the possible braches for
the choices you can make and the payoffs that correspond with those decisions. b) Calculate the expected value of each decision branch above. ( ( ) ( ) ) c) Based on your calculations, what action should you decide on? You should hand in a bid with the highest price and lowest probability....
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This document was uploaded on 01/25/2014.
 Fall '14

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