Figure 17-1

question 163

Multiple Choice

Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies.

-Refer to Figure 17-1.Which of the following statements is correct?

• A) ABC can potentially earn its highest possible profit if it produces a high level of output, and for that reason it is a dominant strategy for ABC to produce a high level of output.
• B) The highest possible combined profit for the two firms occurs when both produce a low level of output, and for that reason producing a low level of output is a dominant strategy for both firms.
• C) Regardless of the strategy pursued by ABC, XYZ's best strategy is to produce a high level of output, and for that reason producing a high level of output is a dominant strategy for XYZ.
• D) Our knowledge of game theory suggests that the most likely outcome of the game, if it is played only once, is for one firm to produce a low level of output and for the other firm to produce a high level of output.

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Definitions:

Capital Budgeting Decisions

The process of making investment decisions in long-term assets and projects, based on their expected cash flows and potential for returns.

Cash Inflows

The total amount of money being received by a company from its various business activities, such as sales revenue, investments, and loans.

Cash Outflows

Cash outflows represent money leaving a business, covering expenses like payroll, rent, materials, and other operational costs, crucial for cash flow management.

Present Value

The current value of a future amount of money or stream of cash flows, discounted back to the present using a specific discount rate.