Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 18, Problem 7MC
To determine
Winner’s curse.
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BPO Services is in the business of digitizing information from forms that are filled out by hand. In 2006, a big client gave BPO a distribution of the forms that it digitized in house last year, and BPO estimated how much it would cost to digitize each form.
Form Type
Mix of Forms
Form Cost
A
0.5
$3.00
B
0.5
$1.00
The expected cost of digitizing a form is
.
Suppose the client and BPO agree to a deal, whereby the client pays BPO to digitize forms. The price of each form processed is equal to the expected cost of the form that you calculated in the previous part of the problem.
Suppose that after the agreement, the client sends only forms of type A.
The expected digitization cost per form of the forms sent by the client is
. This leads to an expected loss of
per form for BPO. (Hint: Do not round your answers. Enter the loss as a positive number.)
How to solve this question?
Consider an antique auction where bidders have independent private values. There are two bidders, each of whom perceives that valuations are uniformly distributed between $100 and $1,000. One of the bidders is Sue, who knows her own valuation is $200. What is Sue's optimal bidding strategy in a Dutch auction?
Chapter 18 Solutions
Managerial Economics: A Problem Solving Approach
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- 1. One time your company needs cash and plans to auction off subsidiaries to the highest bidder. Mention the type of auction that will maximize your company's revenue from the sale if:a. Bidder is neutral on risk and has independent personal judgment?b. Bidder is risk-neutral and has an affiliated valuation estimate? 2. A manager will use a business strategy so that in the long run the company's profits will increase. The entry of competitors has an impact on the unfavorable profitability of the company. To deal with the entry of new competitors, a manager can consider the limit pricing strategy.a. Explain what is meant by limit pricing!b. How can the limit pricing strategy be effective? 3. It is known that the demand function of "I like" brand dry food companies in the monopolistic competition market is P = 100 - 2Q, while the cost function is TC = 5 + 2Q. in this case P = price level, Q = output level, and TC = total cost.a. Determine the combination of prices and production levels…arrow_forwardYou have just received a report suggesting that a chemical your company uses in its manufacturing process is very dangerous. You have not read the report, but you are generally aware of its contents. You believe that the chemical can be replaced fairly easily but that if word gets out, panic may set in among employees and community members. A reporter asks if you have seen the report, and you say no. Is your behavior right or wrong? Explain.arrow_forwardConsider the following situation: five individuals are participating in an auction for an old bicycle used by a famous cyclist. The table below provides the bidders' valuations of the cycle. The auctioneer starts the bid at an offer price far above the bidders' values and lowers the price in increments until one of the bidders accepts the offer. Bidder Value ($) Roberto 750 Claudia 700 Mario 650 Bradley 600 Michelle 550 What is the optimal strategy of each player in this case? Who will win the auction if each bidder places his or her optimal bid? If Claudia wins the auction, how much surplus will she earn?arrow_forward
- An expansion team in a professional sports league is considering locating in one of three cities, A, B, or C. The team estimates that its profit in the three cities, excluding the cost of building a stadium, will be: city A $195 million city B = $200 million city C $210 million The cost of the stadium in any city will be $100 million, but the team expects the winning city to subsidize at least some of this cost. Finally, suppose that each city expects the team to generate the following additional (spillover) economic activity: city A = $75 million city B $60 million city C= $45 million 21. It is efficient for the team to locate in (a) City A. (b) City B. (c) City C. (d) The net return is the same for all three. 22. The net social gain in the efficient city is (a) $210 (b) $270 (c) $170 (d) $155 23. The efficient city will (just) outbid the second-highest bidder if it bids at least (a) $75 (b) S70 (c) $65 (d) $55 A person is considering placing a bet of S100 on team to win a sporting…arrow_forwardYou 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? $1,000 $800 $600 $400arrow_forwardYou ask someone about their preferences over the following pairs of lotteries: Lottery A Lottery B Payoff Probability Payoff Probability $200 25% $200 5% $100 45% $100 90% 30% $0 5% Lottery C Lottery D Payoff Probability Payoff Probability $200 20% $200 0% $100 0% $100 45% $0 80% $0 55% The individual says they prefer lotter A over lottery B, and lottery D over lottery C. Is this person using expected utility theory to evaluate these lotteries? How can you know for certain?arrow_forward
- Consider a game where there is a $2,520 prize if a player correctly guesses the outcome of a fair 7-sided die roll.Cindy will only play this game if there is a nonnegative expected value, even with the risk of losing the payment amount.What is the most Cindy would be willing to pay?arrow_forwardSuppose that you and a friend are playing cards and you decide to make a friendly wager. The bet is that you will draw two cards without replacement from a standard deck. If both cards are spades, your friend will pay you $7. Otherwise, you have to pay your friend $2. Step 1 of 2: What is the expected value of your bet? Round your answer to two decimal places. Losses must be expressed as negative values.arrow_forwardWhich of the following statements is true? Multiple Choice All of the statements are correct. A risk-averse manager will prefer project D. A risk-neutral manager will prefer project D. A risk-loving manager will prefer project D.arrow_forward
- The Dean is looking for a tenured professor. Monetary incentives are needed to get someone interested, but how much? The Dean decides to use an auction to do the job. Two professors, equally qualified, applied for the position. The two professors are invited to covertly submit their bids to the Dean. The Dean will give the position to the professor who submits the lower bid (if there is a tie, the job is assigned randomly). The professor who gets the job will be paid his/her own bid. Each professor's reservation value for teaching the course is his/her private information. It is common knowledge that their reservation values are independently and uniformly distributed over [0,100]. So if a professor with a reservation value of 60 wins with a bid of 50, his payoff is 60 - 50 = 10. (a) Find a Bayesian Nash equilibrium of the bidding game. (b) Suppose the two professors' reservation values are 60 and 70, respectively. What are their bids in the Bayesian Nash equilibrium youcomputed in…arrow_forwardThe Dean is looking for a tenured professor. Monetary incentives are needed to get someone interested, but how much? The Dean decides to use an auction to do the job. Two professors, equally qualified, applied for the position. The two professors are invited to covertly submit their bids to the Dean. The Dean will give the position to the professor who submits the lower bid (if there is a tie, the job is assigned randomly). The professor who gets the job will be paid his/her own bid. Each professor's reservation value for teaching the course is his/her private information. It is common knowledge that their reservation values are independently and uniformly distributed over [0,100]. So if a professor with a reservation value of 60 wins with a bid of 50, his payoff is 60 - 50 = 10. (a) Find a Bayesian Nash equilibrium of the bidding game. (b) Suppose the two professors' reservation values are 60 and 70, respectively. What are their bids in the Bayesian Nash equilibrium youcomputed in…arrow_forwardSuppose a firm's project generates cash flows for ten years. The first-year profits are $1000, and it grows by 3% each year. If the interest rate is 10%, what is the present value of the project? (rounded to the nearest whole number) 7023 7920 8000 8023 Which of the following is false? Group of answer choices An auction is an example of consumer-consumer rivalry. Scarcity implies tradeoffs. The only resource that is available without limit is time. Economic profits consider implicit as well as explicit costs.arrow_forward
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