Exam 12: The Economics of Information

Your firm is planning to hold an auction to sell its mining facility.Your boss has asked you to determine the best type of auction to hold to maximize expected profits from selling the facility.Based on your knowledge of auctions, provide your boss with a suggestion.

An apple farmer must decide how many apples to harvest for the world apple market.He knows that there is a one-third probability that the world price will be $1, a one-third probability that it will be $1.5, and a one-third probability that it will be $2.His cost function is C(Q) = 0.01Q².The expected profit maximizing quantity is:

Jane wants to buy a beautiful doll as a gift for her sister's birthday.She knows that the same product is offered in different shops with prices of $120, $100 and $80 with odds of 1/3 of each price.She just stopped at a shop and knows that the price is $100.Suppose that there is a search cost of $5 for each search.Should she search for one more time?

Your firm is planning to hold an auction to sell its oil field.What type of auction should you suggest to your boss?

You are a hotel manager, and are considering four projects that yield different payoffs, depending upon whether there is an economic boom or recession.The potential payoffs and corresponding payoffs are summarized in the following table. -Which project has the greatest expected value?

You are a hotel manager, and are considering four projects that yield different payoffs, depending upon whether there is an economic boom or recession.The potential payoffs and corresponding payoffs are summarized in the following table. -The variance in the returns of project A is

Which of the following statements is not true?

Tim is offered two gambles.With gamble A, he either gains $2 or loses $1 with a 50% probability.With gamble B, he either gains $3 or loses $2 with a 50% probability.Tim prefers gamble B to gamble A.What can we conclude?

Which of the following statements is true?

A fair coin is flipped.You will be paid $1 when it is heads and penalized $1 otherwise.What is the variance of the payoffs?

When each bidder in an auction knows for sure what the item is worth to that bidder, but doesn't know the valuations of other bidders, the auction exhibits:

John is a seller in an affiliated values auction environment where bidders are risk-neutral.Which auction yields John the greatest expected revenue?

Suppose that 10 percent of the firms selling good X charge the low price.If the remain 90 percent of firms charge $50 per unit and the expected benefit of an additional search is $10, then the lowest price in the market for good X is

".... two prostitutes came to the king (Solomon) and stood before him.One of them said, 'My lord, this woman and I live in the same house.I had a baby while she was there with me.The third day after my child was born, this woman also had a baby.We were alone; there was no one in the house but the two of us. During the night this woman's son died because she lay on him.So she got up in the middle of the night and took my son from my side while I your servant was asleep.She put him by her breast and put her dead son by my breast.The next morning, I got up to nurse my son - and he was dead! But when I looked at him closely in the morning light, I knew that it wasn't the son I had borne.' The other woman said, 'No! The living one is my son; the dead one is yours.' The king said, 'Bring me a sword.' So they brought a sword for the king.He then gave an order: 'Cut the living child in two and give half to one and half to the other.' The woman whose son was alive was filled with compassion for her son and said to the king, 'Please, my lord, give her the living baby.Do not kill him; she is his mother.' But the other said, 'Neither I nor you shall have him.Cut him in two!' Then the king gave his ruling: 'Give the living baby to the first woman.Do not kill him; she is his mother.'" 1 Kings 3 verses 16-27 NIV. King Solomon's actions in this passage illustrate the concept of

According to Wikipedia.com, Former Philippines president Marcos authorized construction of a new nuclear power plant on a known earthquake fault line in the providence of Bataan in the Philippines.The projected $500 million power plant was to be constructed by Westinghouse.The project was backed by EXIR - a U.S.government backed Export Credit Agency - which guaranteed Philippine loan to Westinghouse.The actual project cost amounted to $2.3 billion.Westinghouse was paid despite the fact that the nuclear plant never went online since it was built on a fault line.This illustrates an example of

Which of the following is a feature of a Dutch auction?

The expected profit-maximizing price is:

Consider an auctioneer who is selling an item through an auction.It is known that the 25 risk-neutral bidders have affiliated values that are distributed between $0 and $500 million.Based on this information the auction type that will maximize expected revenue is

Consider a market for product X where 75 percent of the stores charge $500 and 25 percent charge $450.Compute the expected benefit from an additional search when the first search results in a price of $500.

The optimal bid in a first-price, sealed-bid auction with independent private values is to bid: