Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 9

ANALYZING MANAGERIAL DECISIONS: Let's Make a Deal
You work for a company that is frequently involved in negotiations to acquire companies from their current owners. You have been invited to be a guest on the popular television game show Let 's Make a Deal. Your boss has agreed that you can participate on the game show during business hours because you might learn something that would be valuable in future business negotiations.
You are now on the game show. The following events have occurred to this point:
• The game show host showed you three doors, labeled Door #1, Door #2, and Door #3 and told you that behind one of the doors is the grand prize of $100,000. The other two doors contain smaller prizes of no more than $20,000. You assume that the host knows which door has the $100,000.
• You were told to choose one of the doors, and you randomly chose Door #1.
• The host subsequently opened Door #2 and showed you that it contains a smaller prize of $20,000.
• He has given you the following choice. You can keep what is behind Door #1 (your initial choice). You can trade it for the $20,000 behind Door #2. or you can trade it for the unknown contents behind Door #3.
• You want to go for the grand prize of $100,000. Thus you must decide whether to keep Door #1 or trade it for Door #3.
The host subsequently showed you that Door #2 contained $20,000 and gave you the choice to keep what was behind Door #1 or to trade it for what was behind Door #3. What should you do or does it matter (assuming you want to go for the grand prize) [ Hint: "Put yourself behind the host's podium" and consider his choice to show you the contents behind one of the doors. It might be useful to view the situation as a sequential game where you choose the first door at Node 1 and the host subsequently chooses which of the remaining doors to show you at Node 2.]