Question

In: Operations Management

Pizza King (PK) and Noble Greek (NG) are competitive pizza chains. PK believes there is a...

Pizza King (PK) and Noble Greek (NG) are competitive pizza chains. PK believes there is a 25% chance that NG will charge $12 per pizza, a 50% that NG will charge $16 per pizza, and a 20% chance that NG will charge $20 per pizza. If PK charges price p1 and NG charges price p2, PK will sell 250 + 25(p2 – p1) pizzas. It costs PK $8 to make a pizza. PK is considering charging $10, $12, $14, $16, $18, $20, or $22 per pizza. To maximize its expected profit, what price should PK charge for a pizza?

Please show formulas on excel.

Solutions

Expert Solution

First, you have to check the probabilities as they do not sum up to 1.0.

Excel model:

Result:

Best price for PK = $16 for maximum expected profit = $1,860

keosha answered 17 hours ago
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