Deliverable 03

Deliverable 03 – Worksheet 1. Market research has determined estimates for each law firm’s expected profits for the various outcomes of this scenario. If both firms agree to the merger, then each should individually expect a profit of 20 million in the next year. If our client agrees to the merger while the competitor does not, our client would expect profits of 7 million in the next year while the competitor would expect profits of 25 million. If the decisions were reversed then the payouts would also be reversed. If neither Firm agrees to the merger, then both would expect profits of 15 million in the next year. Construct a payoff matrix to represent the profits (in millions of dollars) for each Firm under the different outcomes. If both Firms agree, law firm 1 gets 20 million dollars and law firm 2 gets 20 million dollars If one firm agrees and another firm does not then firm which agree get 7 million dollars and the firm which does not agree gets 25million dollars. If neither agrees then both gets 15 million in next year Firm 1\ Firm 2 Agree Don’t Agree 20M, 20M 7M, 25M 25M, 7M 15M, 15M Agree Don’t Agree 2. Use the payoff matrix from number 1 to determine if a dominant strategy exists for either Firm. Show all of your work. Firm 2 Firm Agree Don’t Agree Agree 20M, 20M 7M, 25M Don’t Agree 25M, 7M 15M, 15M 1 Look for Dominant strategy Fix firm 2 choose Agree, compare firm 1 Pay off. Firm 1 will choose Agree Fix firm 2 choose not Agree, compare firm 1 pay off. Firm 1 will choose not agree. Because Firm one choice is dependent on firm 2 choice, firm 1 does not have a dominant strategy. Look for Dominant strategy Fix firm 1 choose Agree, compare firm 2 Pay off. Firm 2 will choose Agree Fix firm 1 choose not Agree, compare firm 2 pay off. Firm 2 will choose not agree. Because Firm two choice is dependent on firm 1 choice, firm 2 does not have a dominant strategy. Because both the firms are dependent on each other’s choice, that’s why none of the firms has a dominant Strategy. 3. Use the payoff matrix from number 1 to determine any Nash equilibrium points. Show all of your work. Law F1 Law Firm 2 Agree Not agree Agree $ 20 M, 16M $ 7M, $25M Not agree $ 25M, $7M $15M, $15M In the Nash equilibrium table, (agree, agree), there is no firm want to change its strategy based on the other firm’s choice; thus, Nash Equilibrium point. This also shows that (agree, not agree) or (not agree, agree) are not Nash Equilibriums point; each firm would like to change it strategy based on better off. Check (not agree, not agree) neither player wants to change their point. So (not agree, not agree) is Nash Equilibriums point. (Agree, Agree) and (Not Agree, Not Agree) are the two Nash Equilibriums points 4. Explain your recommendation to the client, citing your work from number 2 and number 3. The recommendation that I can make from findings of number 2 and 3 is the decision should be made based on the competitor’s choice. This is because the firms are depending on each other’s choice, that why none of the firm has a dominant strategy. Thus, it would be recommended that (Agree, Agree) and (Not agree, Not Agree) are two Nash equilibrium points. 5. Working in parallel your coworker wants to make the recommendation that the client should agree to the merger no matter what as it will give the chance of obtaining the highest profits. Do you agree with this strategy? Explain why or why not. I don’t agree with my co-worker’s recommendation “co-worker wants to make the recommendation that the client should agree to the merger no matter what as it will give the chance of obtaining the highest profits”. Please see the explanation below Check (agree, agree) Neither firm would want to change their mind based on other firm’s choice, so (agree, agree) is Nash Equilibriums point. Because they will both get highest profit which is 16 million dollars. This also shows that (agree, not agree) or (not agree, agree) are not Nash Equilibriums point. Because both would like change their based on better payoff. In this case one will get less profit who agrees to merger which is $8 million and the other one who does not agree will get $ 15 million dollars. Both the amounts are less compared to where both agrees. If they both agree they will get $16 million dollars each. Check (not agree, not agree) neither player wants to change their point. So (not agree, not agree) is Nash Equilibriums point. In this case they both will get $12 million dollars. No one has
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