8.2 Taco Bell and Taco John’s are two competing fast-food restaurant chains which serve Mexican inspired food items and low prices. Many restaurants have holiday inspired menu items such as the Nachos Navidad at Taco John’s.

Suppose two restaurants similar to Taco Bell and Taco Johns are considering the addition of a holiday menu item. Restaurant 1 is considering a holiday inspired burrito while Restaurant 2 is considering a holiday inspired quesadilla. If neither company releases its product, Restaurant 1 will earn their typical $10 million in quarterly profit while Restaurant 2 will earn $9 million.

If Restaurant 1 decides to release their burrito, they will spend an additional $3 million introducing the new product but gain $4 million in additional revenue while Restaurant 2’s profit will be lower by $1 million. If Restaurant 2 decides to release their quesadilla, they will spend $3 million introducing the new product but gain $4 million in revenue while Restaurant 1’s profit will be lower by $1 million. If both firms release a holiday product, they will each spend $3 million but will each only gain $1 million in revenue.

a. Using the above information, create a payoff matrix using the template provided. Enter the profits in millions of dollars.

b. If Restuarant 1 decides to release their burrito, what will Restaurant 2 decide to do?

c. If Restuarant 1 decides not to release their burrito, what will Restaurant 2 decide to do?

d. Suppose Restaurant 1 and Restaurant 2 make this decision each year around the holidays.
Restaurant 1 is a little more innovative and likes releasing limited time products; they tend to release a holiday menu item 75% of the time. Restaurant 2, on the other hand, is more conservative and only releases holiday menu items 40% of the time. Using this additional information and the profits calculated in the payoff table, what is the expected profit for each firm under each decision?

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A B 1 2 3 4 5 6 7 C E Restaurant 2 (2) Quesadilla Release Do Not Release Restaurant 1 (1) Burrito Release Do Not Release 12 12 2 1212