Exam 12: The Economics of Information

As a personnel director of a major consulting firm, you have been asked to decide whether to hire new employees.Presently the economy is in a recession, and you have more people than you need to operate the business.Next year there is a 65 percent chance you will need more people and a 35 percent chance you will need fewer people.What additional information would you need when making this decision? Explain.

Consider a consumer who is searching for the lowest price for good X.The consumer knows that 75 percent of the time she will find a store charging $10 and 25 percent of the times she will find a store charging $7.The consumer will search again if her marginal cost of searching is constant and is

A risk neutral monopoly must set output before it knows for sure the market price.There is a 50% chance the firm's demand curve will be P = 20 - Q and a 50% chance it will be P = 40 - Q.The marginal cost of the firm is MC = Q.The expected profit-maximizing price is:

Consider an antique auction where bidders have independent private values.There are two bidders, each of which perceives that valuations are uniformly distributed between $100 and $1000.One of the bidders is Sue, who knows her own valuation is $200.What is Sue's optimal bidding strategy in an English auction:

Why do life insurance policies have clauses stipulating that the company will not pay benefits for suicide within one year from the policy date?

If a manager adopted both project A and B simultaneously, the expected value of this joint project would be

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.What is the expected price in the world apple market?

"Guaranteed issue" is a controversial issue in the insurance market.It requires firms offering health coverage for one employee to offer the same coverage to all employees, regardless of their health risks.Why is this so controversial?

When buyers do not observe the quality, what happens in the market?

When managers of firms are given fixed salaries, which are not tied to the firm's profits, they generally put forth less effort than they otherwise would.This is an example of

A consumer spends less time searching for a good when her reservation price is:

Suppose a risk-neutral competitive firm must produce output before the market price is known.If the uncertain price is given by p = p* + e, where e is a random term with an expected value of zero, a competitive firm should shut down in the short run if

Suppose that sellers value a good car at $10,500 and a bad car at $5,500, and quality is not observed by the buyers.What is the highest price that risk-neutral buyers will offer for a used car if they ignore adverse selection when 60 of the cars are good?

Which of the following auction examples have a common value information structure?

Fli-By-Nite Airlines has 1,000 customers.These customers are of two types.Day customers are willing to pay $700 for a flight that has a daytime departure and arrival but only $200 for a flight on the red-eye.Night customers will pay $500 for a flight that has a daytime departure and $300 for a flight on the red-eye.You are the manager for Fli-By-Nite and unable to determine whether any given individual is a day customer or a night customer.Can you think of a self-selection mechanism that would permit you to identify day and night customers?

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

Suppose that both buyers and sellers observe the quality.What happens?

OJ's Orange Juice produces orange juice to sell in competitive market.Given uncertainty in weather patterns, OJ has to determine how much juice to produce prior to knowing the competitive price.It is estimated that the competitive price will be $5 with 10 percent chance and a 90 percent chance the price will be $2.If the marginal cost of producing orange juice is MC(Q) = 2Q, then to maximize expected profits, OJ should produce

Consider 45 risk-neutral bidders who are participating in a second-price, sealed bid auction.It is commonly known that bidders have independent private values.Based on this information we know the optimal bidding strategy for each bidder is to

A risk averse individual would