MHR 721 Lecture Notes - Lecture 2: The Negotiation, Best Alternative To A Negotiated Agreement, Satisficing
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1. You are bidding in a second-price auction for a painting that you value at $800. You estimate that other bidders are most likely to value the painting at between $200 and $600. Which of these is likely to be your best bid?
a. $1,000
b. $800
c. $600
d. $400
2. Which of the following is true about different ways of conducting a private-value auction?
a. A first-price auction is strategically equivalent to a second-price auction.
b. A first-price auction is strategically equivalent to an English auction.
c. A second-price auction is strategically equivalent to an English auction.
d. None of the above
3. Suppose that five bidders with values of $500, $400, $300, $200, and $100 attend an oral auction. Which of these is closest to the winning price?
a. $500
b. $400
c. $300
d. $200
4. In the above auction, if the bidders with the first- and third-highest values ($500 and
$300) collude, which of these is closest to the winning price?
a. $500
b. $400
c. $300
d. $200
5. If a seller is concerned about collusion among bidders, which of the following changes to the auction, should the seller make?
a. Hold frequent, small auctions instead of infrequent large auctions.
b. Conceal the amount of winning bids.
c. Publically announce the name of each auction's winner.
d. Hold a second-price instead of a first-price auction.
6. You're holding an auction to license a new technology that your company has developed. One of your assistants raises a concern that bidders' fear of the winner's curse may encourage them to shade their bids. How might you address this concern?
a. Release your analyst's positive scenario for the technology's future profitability.
b. Release your analyst's negative scenario for the technology's future profitability.
c. Use an oral auction.
d. All of the above
7. In a first-price auction, you bid ________ your value, and in a second-price auction you bid _________ your value.
a. at; above
b. below; above
c. below; at
d. below; below
8. You hold an auction among three bidders. You estimate that each bidder has a value of either $16 or $20 for the item, and you attach probabilities to each value of 50%. What is the expected price? If two of the three bidders collude, what is the price?
9. In Sweden, firms that fail to meet their debt obligations are immediately auctioned off to the highest bidder. (There is no reorganization through Chapter 11 bankruptcy.) The current managers are often high bidders for the company. Why?
10. When a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, representatives of other museums that have no chance of winning are actively wooed by the auctioneer to attend anyway. Why?
11. The deities Mars and Venus often do battle to create the weather conditions on Earth. Venus prefers extreme temperatures (especially heat), while Mars prefers temperate conditions. The payoffs (expressed in Points of Wrath) are given below.
|
|
Venus |
|
|
|
Warm |
Chill |
Mars |
Warm |
20 , 0 |
0 , 10 |
Chill |
0 , 90 |
20 , 0 |
What is the unique mixed-strategy equilibrium of the above game?
(Let p be the probability of "Warm" for Mars, and q the probability of "Warm" for Venus.)
a) p=9/10, q=1/2
b) p=1/2, q=1/10
c) p=1/2, q=1/2
d) p=1/10, q=1/10
Player 2
|
|
H |
D |
Player 1 |
H |
0 , 0 |
4 , 1 |
D |
1 , 4 |
2 , 2 |
12. The above game is the title of the hawk-dove game and used by evolutionary biologists to describe evolutionary processes. It is also used to model how a business should grow. In the above game, what is the Nash equilibrium in pure strategies and mixed strategies.?
Assume the cost of producing the goods is zero and that each consumer will purchase each good as long as the price is less than or equal to value. Consumer values are the entries in the table.
|
Good 1 |
Good 2 |
Consumer A |
$2,300 |
$1,700 |
Consumer B |
$2,800 |
$1,200 |
13. Suppose the monopolist only sold the goods separately. What price will the monopolist charge for good 1 to maximize revenues for good 1?
a. $2,300
b. $2,800
c. $1,200
d. $1,700
14. What is the total profit to the monopolist from selling the goods separately?
a. $4,500
b. $6,300
c. $7,000
d. $6,000
15. What is a better pricing strategy for the monopolist? At this price, what are the total profits to the monopolist?
a. Bundle the goods at $2,800; Profits = $5,600
b. Bundle the goods at $4,000; Profits = $8,000
c. Charge $2,800 for good 1 and charge $1,700 for good 2; Profits = $4,500
d. Charging the lowest price for each good individually is the best pricing strategy; Profits = $7,000
16. The prisoners' dilemma is an example of
a. a sequential game.
b. a simultaneous game.
c.a shirking game.
d. a dating game
17. Nash equilibrium
a. is where one player maximizes his payoff, and the other doesn't.
b. is where each player maximizes his own payoff given the action of the other player.
c.is where both players are maximizing their total payoff.
d. is a unique prediction of the likely outcome of a game.
Tax Strategies for Business Planning andInvestment
Tax Planning Case II: Entity Selection
Weâve received an inquiry from a client and weâd like you todraft a memorandum indicating how we should respond to these clientinquiries. The inquiry concerns the formation of a business and ouranalysis of the impact various entity types might have on thebusiness.
Please format your memorandum to Identify significant tax andnontax issues or concerns that may differ across entity types anddiscuss how they are relevant to the choice of entity decision forthe clientâs business. Include a brief summary of the inquiry, youranalysis of the inquiry, the issues posed, any relevantcomputations and your recommendations. Please include yourcomputations directly in your memorandum and do not attach them ina separate Excel spreadsheet.
Please format the memorandum as follows:
MEMORANDUM
To: Eugene Kilo, Smith TaxConsultants
From: [Team members, provide your own titles]
Re: Various Tax Matters
Date: [Applicable Date]
Martha Taylor is currently employed by the Maryland Chamber ofCommerce. While she enjoys the relatively short workweeks, sheeventually would like to work for herself rather than for anemployer. In her current position, she deals with a lot ofsuccessful entrepreneurs who have become role models for her.Martha has also developed an extensive list of contacts that shouldserve her well when she starts her own business.
It has taken a while but Martha believes she has finallydeveloped a viable new business idea. Her idea is to design andmanufacture cookware that remains cool to the touch when in use.She has had several friends try out her prototype cookware and theyhave consistently given the cookware rave reviews. With thisencouragement, Martha started giving serious thoughts to makingâCool Touch Cookwareâ (CTC) a moneymaking enterprise.
Martha had enough business background to realize that she isembarking on a risky path, but one, she hopes, with significantpotential rewards down the road. After creating some initial incomeprojections, Martha realized that it will take a few years for thebusiness to become profitable. After that, she hopes the skyâs thelimit. She would like to grow her business and perhaps at somepoint âgo publicâ or sell the business to a large retailer. Thiscould be her ticket to the rich and famous.
Martha, who is single, decided to quit her job with the stateChamber of Commerce so that she could focus all of her efforts onthe new business. Martha had some savings to support her for awhile but she did not have any other source of income. Martha wasable to recruit Linda and Mike to join her as initial equityinvestors in CTC. Linda has an MBA and a law degree. She wasemployed as a business consultant when she decided to leave thatjob and work with Martha and Mike. Lindaâs husband earns around$300,000 a year as an engineer (employee). Mike owns avery profitable used car business. Because buying andselling used cars takes all his time, he is interested in becomingonly a passive investor in CTC. He wanted to get in on the groundfloor because he really likes the product and believes CTC will bewildly successful. While CTC originally has three investors, Marthaand Linda have plans to grow the business and seek more owners andcapital in the future.
The three owners agreed that Martha would contribute land andcash for a 30 percent interest in CTC, Linda would contributeservices (legal and business advisory) for the first two years fora 30 percent interest, and Mike would contribute cash for a 40percent interest. The plan called for Martha and Linda to beactively involved in managing the business while Mike would notbe.
The three equity ownersâ contributions are summarized asfollows:
Martha Contributed | FMV | Adjusted Basis | Ownership Interest |
Land (held as investment) | $120,000 | $70,000 | 30% |
Cash | $30,000 | ||
Linda Contributed | |||
Services | $150,000 | 30% | |
Mike Contributed | |||
Cash | $200,000 | 40% |
Working together, Martha and Linda made the following five-yearincome and loss projections for CTC. They anticipate the businesswill be profitable and that it will continue to grow after thefirst five years.
Cool Touch Cookware 5-Year Income and Loss Projections | ||||||||||||
|
With plans for Martha and Linda to spend a considerable amountof their time working for and managing CTC, the owners would liketo develop a compensation plan that works for all parties. Down theroad, they plan to have two business locations (in differentcities). Martha would take responsibility for the activities of onelocation and Linda would take responsibility for the other.Finally, they would like to arrange for some performance-basedfinancial incentives for each location.
To get the business activities started, Martha and Lindadetermined CTC would need to borrow $800,000 to purchase a buildingto house its manufacturing facilities and its administrativeoffices (at least for now). Also in need of additional cash, Marthaand Linda arranged to have CTC borrow $300,000 from a local bankand to borrow $200,000 cash from Mike. CTC would pay Mike a marketrate of interest on the loan but there was no fixed date forprincipal repayment.