In game theory, the manager of a corporate division faces the possibility of an audit every year. She prefers to spend time preparing if she will be audited; otherwise, she would prefer to invest her time elsewhere. The auditor, who gets recognized for uncovering problems, prefers to audit unprepared clients. If the players match their actions (i.e., the manager prepares and the auditor audits, or the manager doesn't prepare and the auditor doesn't audit), the manager wins with a payoff of 20, and the auditor loses with a payoff of - 20. If the actions don't match, the auditor wins with a payoff of 20, and the manager loses with a payoff of - 20.

Show this game on a diagram, and comment on the equilibrium. (12 Marks)

b. In 1931, Pepsi was almost broke. The Great Depression hit it hard and Coke had most of the duopoly market for soft drinks in the United States. Pepsi tried many things: marketing campaigns, label changes, and more. Then it came up with the idea of selling 12-ounce bottles for 5c, which had been the price of 6-ounce bottles. Coke could have followed the price per unit down, but it didn't. Total soft drink demand increased, and Pepsi took a larger share of the demand.

Explain why the equilibrium of this game different from that of a prisoners' dilemma.

(8 Marks)