Economics homework help

Economics homework help. 1 . Individual Problems 18-1
You hold an oral, or English, auction among three bidders. You estimate that each bidder has a value of either \$28 or \$35 for the item, and you attach probabilities to each value of 50%. The winning bidder must pay a price equal to the second highest bid.
The following table lists the eight possible combinations for bidder values. Each combination is equally likely to occur.
On the following table, indicate the price paid by the winning bidder.

 Bidder 1 Value Bidder 2 Value Bidder 3 Value Probability Price (\$) (\$) (\$) \$28 \$28 \$28 0.125 \$28 \$28 \$35 0.125 \$28 \$35 \$28 0.125 \$28 \$35 \$35 0.125 \$35 \$28 \$28 0.125 \$35 \$28 \$35 0.125 \$35 \$35 \$28 0.125 \$35 \$35 \$35 0.125

The expected price paid is
.
Suppose that bidders 1 and 2 collude and would be willing to bid up to a maximum of their values, but the two bidders would not be willing to bid against each other. The probabilities of the combinations of bidders are still all equal to 0.125. Continue to assume that the winning bidder must pay a price equal to the second highest bid.
On the following table, indicate the price paid by the winning bidder.

 Maximum of Bidder 1 and 2 Bidder 3 Value Probability Price (\$) (\$) \$28 \$28 0.125 \$28 \$35 0.125 \$35 \$28 0.125 \$35 \$35 0.125 \$35 \$28 0.125 \$35 \$35 0.125 \$35 \$28 0.125 \$35 \$35 0.125

With collusion, the expected price paid is

2 . Individual Problems 18-2
A reserve price is a minimum price set by the auctioneer. If no bidder is willing to pay the reserve price, the item is unsold at a profit of \$0 for the auctioneer. If only one bidder values the item at or above the reserve price, that bidder pays the reserve price. An auctioneer faces two bidders, each with a value of either \$36 or \$96, with both values equally probable. Without a reserve price, the second highest bid will be the price paid by the winning bidder.
The following table lists the four possible combinations of bidder values. Each combination is equally likely to occur.
On the following table, indicate the price paid by the winning bidder with and without the stated reserve price.

 Bidder 1 Value Bidder 2 Value Probability Price Without Reserve Price with \$96 Reserve Price (\$) (\$) (\$) \$36 \$36 0.25 \$36 \$96 0.25 \$96 \$36 0.25 \$96 \$96 0.25

Without a reserve price, the expected price is
. With a reserve price of \$96, the expected price is
. Thus, the expected price is larger with or without    the reserve price.

3 . Individual Problems 18-3
A reserve price is a minimum price set by the auctioneer. If no bidder is willing to pay the reserve price, the item is unsold at a profit of \$0 for the auctioneer. If only one bidder values the item at or above the reserve price, that bidder pays the reserve price. An auctioneer faces two bidders, each with a value of either \$228 or \$304, with both values equally probable. Without a reserve price, the second highest bid will be the price paid by the winning bidder.
The following table lists the four possible combinations for bidder values. Each combination is equally likely to occur.
On the following table, indicate the price paid by the winning bidder with and without the stated reserve price.

 Bidder 1 Value Bidder 2 Value Probability Price Without Reserve Price with \$304 Reserve Price (\$) (\$) (\$) \$228 \$228 0.25 \$228 \$304 0.25 \$304 \$228 0.25 \$304 \$304 0.25

Without a reserve price, the expected price is
. With a reserve price of \$304, the expected price is
. Thus, the expected price is larger with or without    the reserve price.

4 . Individual Problems 18-4
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 the high bidders for the company. (Hint: Assume these auctions are common-value auctions.)
Suppose for a particular auction, the current managers have placed a bid of \$10 million.
True or False: To avoid the winner’s curse, your bid should be larger than \$10 million.
True
False
5 . Individual Problems 18-5
When a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, the auctioneer actively woos representatives of other museums that have no chance of winning to attend anyway.
Suppose a piece of art has recently become available for sale and will be auctioned off to the highest bidder, with the winner paying an amount equal to the second highest bid. Assume that most collectors know that Darnell places a value of \$100,000 on the art piece and that he values this art piece more than any other collector. Suppose that if no one else shows up, Darnell simply bids \$100,0002=\$50,000
and wins the piece of art.
The expected price paid by Darnell, with no other bidders present, is
.
Suppose the owner of the artwork manages to recruit another bidder, Felix, to the auction. Felix is known to value the art piece at \$80,000.
The expected price paid by Darnell, given the presence of the second bidder Felix, is
.

6 . Individual Problems 18-6
Rina Green estimates the cost of future projects for a large contracting firm. Rina uses precisely the same techniques to estimate the costs of every potential job and formulates bids by adding a standard profit markup. For some companies, to which the firm offers its services, there are no competitors also seeking their business, so Rina’s company is almost certain to get these companies as clients. For these jobs, Rina finds that her cost estimates are right, on average. For jobs where competitors are also vying for the business, Rina finds that they almost always end up costing more than she estimates.
True or False: Rina is less likely to win the jobs where she underestimates the costs, causing her to experience the winner’s curse.
True
False
7 . Individual Problems 19-1
In the late 1990s, car leasing was very popular in the United States. A customer would lease a car from the manufacturer for a set term, usually two years, and then have the option of keeping the car. If the customer decided to keep the car, the customer would pay a price to the manufacturer, the “residual value,” computed as 60% of the new car price. The manufacturer would then sell the returned cars at auction. In 1999, manufacturers lost an average of \$480 on each returned car (the auction price was, on average, \$480 less than the residual value).
Suppose two customers have leased cars from a manufacturer. Their lease agreements are up, and they are considering whether to keep (and purchase at 60% of the new car price) their cars or return their cars. Two years ago, Becky leased a car valued new at \$10,000. If she returns the car, the manufacturer could likely get \$7,000 at auction for the car. Clancy also leased a car, valued new at \$17,000, two years ago. If he returns the car, the manufacturer could likely get \$8,670 at auction for the car.
Use the following table to indicate whether each buyer is more likely to purchase or return the car.

 Buyer Keep and Purchase Car Return Car Becky Clancy

The manufacturer will lose money (at auction, relative to the residual value of the car) if Becky or Clancy    returns the car instead of keeping and purchasing it.
True or False: Setting a more accurate residual price of each car would help attenuate the problems of adverse selection.
True
False
8 . Individual Problems 19-2
Many police officer positions require the applicant to have a college degree, even though the tasks of a police officer rarely call upon college course material.
Suppose two individuals who do not have college degrees are considering applying to the police force. Teresa is considering applying for an officer position and plans on working for the police force for a period of time, over which she would earn approximately \$1,200,000 (in present discounted value) in earnings while in the position. Andrew is also considering applying, and plans on working as an officer for a period of time, over which he would earn approximately \$4,000 (in present discounted value) in lifetime earnings while in the position. Also suppose that present value of obtaining a college degree, which is required to submit a job application to the police department, is \$100,000.
Use the following table to indicate whether each individual would likely apply, or not, given the cost of obtaining a college degree.

 Buyer Would Apply Would Not Apply Teresa Andrew

9 . Individual Problems 19-3
Suppose that you sell bicycle theft insurance and bicycle owners do not know whether they are high- or low-risk consumers.
True or False: This situation causes an adverse selection problem, but only if the person is a low-risk consumer.
True
False
10 . Individual Problems 19-4
When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction. The bids for the jobs consisted of promises of future profit streams that the managers would generate and then deliver to the state. In cases where the incumbent manager was the winning bidder, firm productivity tended to increase dramatically. When outside bidders won, there was little productivity improvement. Assume that incumbent managers and new managers had similar qualifications.
True or False: This result stems from information asymmetry between incumbent managers and outside bidders.
True
False
11 . Individual Problems 19-5
Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose a sales representative is trying to sell a company a new accounting system that will, with certainty, reduce costs by 20%. However, the customer has heard this claim before and believes there is only a 30% chance of actually realizing that cost reduction and a 70% chance of realizing no cost reduction.
Assume the customer has an initial total cost of \$300.
According to the customer’s beliefs, the expected value of the accounting system, or the expected reduction in cost, is
.
Suppose the sales representative initially offers the accounting system to the customer for a price of \$39.00.
The information asymmetry stems from the fact that the sales rep or buyer    has more information about the efficacy of the accounting system than does the sales rep or buyer    . At this price, the customer will or will not    purchase the accounting system, since the expected value of the accounting system is greater or less    than the price.
Instead of naming a price, suppose the sales representative offers to give the customer the product in exchange for 50% of the cost savings. If there is no reduction in cost for the customer, then the customer does not have to pay.
True or False: This pricing scheme alleviates some of the information asymmetry that is present in this scenario.
True
False

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