Joe Is the Owner of the 7-11 Mini Mart,Sam Is

question 44

Multiple Choice

Joe is the owner of the 7-11 Mini Mart,Sam is the owner of the SuperAmerica Mini Mart and together they are the only gas stations in town.At the current price of $3 per gallon,both receive total revenues of $1,000.Joe is considering cutting his price to $2.90,which would increase his total revenue to $1,350 if Sam continues to charge $3.If Sam's price remains $3 after Joe cuts his price,Sam will collect $500 in revenues.If Sam cuts his price to $2.90,his total revenues would also rise to $1,350 if Joe continues to charge $3.Joe will collect $500 in revenues if he keeps his price at $3 while Sam lowers his to $2.90.Joe and Sam will receive $900 each in total revenue if they both lower their price to $2.90.You may find it easier to answer the following question if you fill in the payoff matrix below. $\begin{array}{c}\quad \quad \quad \quad \quad \quad \quad \text { Joe }\\\text { Sam }\begin{array}{|c|c|c|} \hline& \begin{array}{c}\text { Cut } \\\text { Price }\end{array} & \begin{array}{c}\text { Keep Old } \\\text { Price }\end{array} \\\hline \text { Cut } & & \\\text { Price } & & \\\hline \begin{array}{c}\text { Keep Old } \\\text { Price }\end{array} & & \\\hline\end{array}\end{array}$
Refer to the information given above.To Joe,leaving his price at $3 is a:

• A)revenue maximizing strategy.
• B)dominant strategy.
• C)dominated strategy.
• D)profit maximization strategy.

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Definitions:

Preferred Stock

A class of ownership in a corporation with a higher claim on its assets and earnings than common stock.

Par Value

A nominal or face value assigned to a share of stock by the company's charter, not necessarily reflecting its market value.

Yielding

The act of producing or generating an income or return from an investment over a specified period of time.

Constant Growth Model

A method to estimate the value of a stock by assuming a constant rate of dividend growth.