The Managers of Alpha and Beta Must Make Repeated Advertising

question 57

Multiple Choice

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. Beta expects punishment to last for two months after being caught .What would be the value-maximizing decision for Beta?

• A)Cooperate since $3,000 > PV_{Benefits of cheating}.
• B)Cooperate since $6,500/(1.025)> PV_{Benefits of cheating}.
• C)Cheat since PV_{Benefits of cheating} > $2,820.
• D)Cheat since PV_{Benefits of cheating} < $5,641.

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