Suppose Two Companies, Macrosoft and Apricot, Are Considering Whether to Develop

question 17

Multiple Choice

Suppose two companies, Macrosoft and Apricot, are considering whether to develop a new product, a touch-screen t-shirt. The payoffs to each of developing a touch-screen t-shirt depend upon the actions of the other, as shown in the payoff matrix below (the payoffs are given in millions of dollars) .  
Suppose Apricot makes its decision first, and then Macrosoft makes its decision after seeing Apricot's choice. What will happen if, before Apricot chooses, Macrosoft announces that it is going to develop a touch-screen t-shirt no matter what Apricot does?

• A)Apricot will develop a touch-screen t-shirt, and Macrosoft will not because Macrosoft's threat is not credible.
• B)Macrosoft will develop a touch-screen t-shirt, and Apricot will not because it's not in Apricot's interest to develop a touch-screen t-shirt if Macrosoft also develops one.
• C)Both Apricot and Macrosoft will develop a touch-screen t-shirt because neither company will want to back down.
• D)Neither Apricot nor Macrosoft will develop a touch-screen t-shirt because they will both realize that they are in a no-win situation.

---

Definitions:

Discount Rate

The interest rate used to discount future cash flows of a project or investment to determine its present value.

Defensive Merger

A strategy where a company merges with or acquires another company to protect itself against potential competitors or hostile takeovers.

Hostile Takeover

An acquisition attempt by a company or individual against the target company's wishes.

Cash Bidding Price

The price offered in cash during an auction or bidding process for an asset or item.