Economics 1021A/B Study Guide - Quiz Guide: Economic Equilibrium

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ECON 1021A/B Full Course Notes

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As a consequence of the winner(cid:495)s curse problem, the determining factor for the chance purposed to achieve a certain profitability (e. g. ro)(cid:524). The (cid:494)optimal(cid:495) bid will not of winning depends on the value estimate. The bid level adjustment is primarily necessarily win but save the bidder a certain return on investment. In general, it can be stated that the prevalence of high uncertainty results in higher overestimates and vice versa. Historical data on similar auctions or tracts where a player participated can help to find out a close estimate. The model already incorporates the differences in evaluation criteria. In the end, variance estimates can still be adjusted in accordance with the present level of uncertainty and information symmetry: lastly, the simulation will be run with the described input data. The model runs thousands of trials with different possible values for random variables. After sufficient trials, the expected results are printed.

Related Questions

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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.

viridianlocust640

You're the resident economic expert of Medicine. The CEO, Jeff, is asking you to complete a project that another person, Shawn, had started working on before he retired. The project is time-sensitive. Jeff explains that Medaline has a manufacturing plant that produces a prescription topical cream called DermaPlus, which is used for treating certain skin conditions. Hospitals and pharmacies are the main buyers of DermaPlus. The market for this cream is extremely competitive. Several other firms produce creams that are almost identical to DermaPlus. Medaline's current share of the market for this type of topical cream is so small that it cannot influence the market price. On the other hand, because Medaline is relatively small compared to the size of the market, it can sell as much of the cream as it likes at the prevailing market price. The plant producing DermaPlus has been operating for a little over three years with the same manufacturing equipment. Currently, there are no plans for upgrading or adding to this equipment. Over the last three years, the price of DermaPlus and related creams has been quite volatile and Medaline has tried to react to the changing price by varying its output level to constantly maximize its monthly profit. To date, Medaline has been able to vary monthly production quite easily by taking advantage of a flexible, none union workforce with a large number of part-time workers. However, the workforce at the DermaPlus plant is just about to be unionized. Once that happens, it will become much more difficult to vary the amount of labour used in the short run and therefore much more difficult to vary the monthly production of DermaPlus. Before he left, Shawn had been asked to estimate the short-run cost functions for the DermaPlus manufacturing plant. The goal was to use this information to determine the profit-maximizing output level and use that information to estimate the optimal size for the newly unionized workforce. Jeff tells you that DermaPlus and related products are just about to come under the umbrella of a new reference-based pricing scheme. Under the new scheme, the government will set the price of DermaPlus and competing creams and review that price every two years. Once the price has been set Medaline and other manufacturers simply have to decide how much of the cream, if any, they want to produce and sell. Unfortunately, although the workforce will be unionized in just over a week, the referenced based price for DermaPlus will not be announced for another two months. Consequently, Medaline has to choose the size of its workforce (and therefore its production capacity) before it knows the price it will get for its product. To reduce the uncertainty about this decision, Jeff recently hired a consultant with expertise in the pharmaceutical industry and reference-based pricing to estimate the price that will be announced for DermaPlus. The consultant estimates that there is a 6% chance that the price will be $50 per unit, a 19% chance that the price will be $100 per unit and a 75% chance that the price will be $150 per unit. This is the best estimate the consultant can provide given the lack of information coming from the government about the issue. After giving you this background information, Jeff asks you to complete the following tasks:

1. Determine the profit-maximizing average monthly production capacity for DermaPlus for each of the possible reference-based prices identified by the consultant. Estimate the expected monthly profit in each case.

2. Recommend an average monthly production capacity for the next 12 months given the uncertainty about the price of DermaPlus. Your recommendation will be used to set the size of the manufacturing plant's unionized workforce. (Note: You simply have to determine the best monthly production capacity for the next 12 months, not the number of workers required.)

3. Write a short report summarizing the results of your analysis and any recommendations. Jeff makes it clear to you that he is a risk-neutral person. You only have a week to complete the analysis, interpret the results, and summarize your findings and recommendations in a brief report. When Jeff makes his recommendations about the structure and format of the report you realize that they are much the same for Assignment 1 that you completed at another company. Finally, Jeff gives you a copy of one of Shawn's spreadsheets. This one contains data that Shawn collected on the variables he thought would be needed to estimate the short-run cost functions for DermaPlus and the firm's profit-maximizing output level. Jeff makes it clear that he has complete confidence in Shawn's technical abilities and professional judgment and tells you to take the information in Shawn's spreadsheet at face value and to use it as a starting point for your analysis.

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Economics 1021A/B Study Guide - Quiz Guide: Economic Equilibrium

ECON 1021A/B Full Course Notes

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