Question 1

In a game of chicken,what is the best strategy for you to adopt?

Accepted Answer

In a game of chicken, committing to a position and making sure your rival understands can force them to yield, as they may perceive your commitment as credible and thus avoid a collision.

Question 2

You pay $60 at a mall video game store for a computer game that you have been dying to play.Three months later,while at the same mall video game store,you see the same game for $20.What is this an example of?

Accepted Answer

This is an example of indirect price discrimination where the seller charges a higher price to early buyers who value it more and lower the price later to attract price-sensitive buyers.

Question 3

Suppose there is the following oral auction with two bidders.What is the expected revenue of the auction? $$\begin{array} { l l l } 
\text { Bidder 1 } & \text { Bidder } 2 & \text { Prabability } \
\hline 10 & \$ 10 & .25 \
\$ 10 & \$ 15 & .25 \
\$ 15 & \$ 10 & .25 \
\hline 15 & \$ 15 & .25
\end{array}$$

Accepted Answer

The expected revenue is the sum of the products of the bids and their probabilities. So, the expected revenue is:(10 * .25) + (10 * .25) + (15 * .25) + (15 * .25) = $11.25

Question 4

When a home in Nashville went up for sale,the person interested in buying a home wanted to have the house inspected.The person selling the home encouraged the buyer to inspect the house before the sale is final.Which statement is true?

Accepted Answer

The buyer is trying to solve the problem of adverse selection by inspecting the house before the sale is final. This will help the buyer to determine if there are any hidden problems or defects that may not be visible during a casual viewing of the house. By doing so, the buyer can make a more informed decision about whether or not to proceed with the purchase, and can negotiate a fair price given any issues that are found.

Question 5

In a principal-agent relationship,the principal's goal is to...

Accepted Answer

In a principal-agent relationship, the principal hires an agent to perform a task or represent their interests, but there is a risk that the agent may act in their own self-interest instead of the principal's. Therefore, the principal's goal is to align the agent's incentives with their own goals to ensure that the agent acts in the principal's best interest. This can be achieved through various means, such as offering incentives or monitoring the agent's behavior. Controlling the agent or eradicating shirking are not necessarily the primary goals, but rather means to achieve the goal of aligning incentives. Paying the agent is a necessary part of the relationship but not the principal goal.

Question 6

The marginal cost of a software company is zero.There are equal numbers of home users and commercial users,and the company cannot distinguish between the users.What is the best strategy for a software developer given the demand below? Demand for software
$$\begin{array} { | l | l | l | } 
\hline \text { Software Versian } & \text { Hame user } & \text { Commercial user } \
\hline \text { Disabled version } & \$100 & \$150 \
\hline \text { Full-featured version } & \$150 & \$450 \
\hline
\end{array}$$

Accepted Answer

The answer of The marginal cost of a software company...

Question 7

If a tire company knows that customers buying insurance for their tires will increase the likelihood of being reckless,there is a problem of _____________.In order to combat this problem,the tire company should__________.

Accepted Answer

The problem is of moral hazard because customers know that they are insured and hence, tend to take more risks. To combat this, the tire company should require the customer to sign a contract stating that insurance does not cover tire repair for reckless driving, thus reducing the incentive for reckless behavior. Option D addresses this issue effectively.

Question 8

If you suspect collusion in auctions,what should you NOT do?

Accepted Answer

The answer of If you suspect collusion in auctions,what should...

Question 9

In a company that is experiencing economies of scale,which of the following is true?

Accepted Answer

Economies of scale occur when a company experiences a decrease in average total cost as it increases its level of output. This is due to the company enjoying cost advantages such as bulk purchasing, more efficient production processes, and spreading fixed costs over a larger output. Thus, choice A is the correct answer.

Question 10

You,a real-estate developer,own a piece of land in Nassau,Bahamas,next to an equal size piece of land owned by a competitor.Both of you have the choice of building a casino or a hotel.Your payoffs are as follows:  How much is it worth to you to get your casino building permit first?

Accepted Answer

The answer of You,a real-estate developer,own a piece of land...

Question 11

Ten bidders in an oral auction have the following values for an antique clock ($10,$9,$8,$7,$6,$5,$4,$3,$2,$1).If bidders of the $10 and $9 bids collude and bidders of the $3,$4,and $5 bids collude what will the winning price be?

Accepted Answer

Colluding bidders means that they will coordinate their actions to ensure that one of them will win and they will split the cost amongst themselves. Thus, the two colluding bidders with the highest values, $10 and $9, will work together to win the auction. Since the other bidders do not have a combined value higher than $8, the colluding bidders will win and the price will be the next highest bid, which is $8. The collusion between bidders $3, $4, and $5 is irrelevant to the outcome, as they do not have a combined value high enough to win the auction.

Question 12

Why might a company use an indirect price discrimination scheme versus direct price discrimination?

Accepted Answer

Indirect price discrimination is used when different customer types cannot be uniquely identified directly. This could be due to legal or ethical concerns, privacy issues, or simply because it is difficult to distinguish between different customer types. Indirect price discrimination allows the company to offer different prices or discounts to different groups without explicitly identifying them, thereby avoiding potential customer resentment or backlash.

Question 13

If you were attempting to reduce the possibility of moral hazard with your employees using corporate car insurance,you would NOT:

Accepted Answer

The answer of If you were attempting to reduce the...

Question 14

Which is not an example of bundling?

Accepted Answer

A large tub of popcorn at the movie theatre is a single item purchase, not a combination of products or services sold together as a package.

Question 15

Which feature is not included in the best strategies that earn the highest profit in a repeated Prisoner's Dilemma?

Accepted Answer

Being envious is not a feature of successful strategies in the repeated Prisoner's Dilemma, as it can lead to unnecessary competition and conflict rather than cooperation.

Question 16

Which of the following is an example of an effective screening technique?

Accepted Answer

The answer of Which of the following is an example...

Question 17

Antilock brakes,airbags,and seatbelts increased the number of accidents while simultaneously decreasing the number of fatal accidents.Why does this happen?

Accepted Answer

The increased safety measures such as antilock brakes, airbags, and seatbelts can create a moral hazard. This means that drivers may feel more protected and take more risks while driving, knowing that they have these safety measures in place. As a result, the number of accidents may increase. However, because these safety measures are effective at reducing the severity of accidents, the number of fatal accidents decreases.

Question 18

Company X produces a single product Y.Company X runs an advertising campaign that they are sure will differentiate product Y from their competitors and make Y more attractive.Assuming they are correct,what will happen to the demand of Y and what should pricing strategy should they employ?

Accepted Answer

If Company X is correct in their advertising campaign, then the product Y will become more attractive and differentiated from their competitors. This will make the demand for product Y less elastic, meaning that consumers will be willing to pay a higher price for it. Therefore, Company X should raise the price of product Y to maximize their profits.

Question 19

Domino Sugar Company is considering buying Fisher Honey Company for $100 million.Based on information obtained from 500 supermarkets around the country,when the price of 1 lb.of Domino Sugar went on sale from $2.00 to $1.50,the average number of 1 lb.boxes of sugar rose from 200 boxes in a week to 300 boxes.The following week,when 1 lb.boxes of Fisher Honey went on sale for $2.50 from the original price of $3.00,the number of boxes of honey sold increased from 200 to 275 boxes.If the sale of Fisher Honey to Domino Sugar goes through,what changes to each products price Domino Sugar make?

Accepted Answer

The answer of Domino Sugar Company is considering buying Fisher...

Question 20

A fifth-grade entrepreneur decides to sell playground protection.He decides he will pay protection holders $5 if they get beat up by the playground bully ($5 is a rough estimate of the monetary value of the pain a beaten-up student experiences).On the playground,20% of the kids are wimps,and 80% are not.The probability that a non-wimp will get beat up by the bully is .3.This probability doubles for wimps.Assuming the kids know if they are wimps or not,where should the entrepreneur price his protection policy (pricing at fair value)?

Accepted Answer

The entrepreneur needs to price his protection policy at a fair value, meaning that on average, he shouldn't lose money by paying out more in protection than he receives in premiums. Let's consider the expected value of paying out for each type of student:

For a non-wimp:
Probability of getting beat up = 0.3
Expected payout = 0.3 x $5 = $1.50

For a wimp:
Probability of getting beat up = 0.6 (double the probability of a non-wimp)
Expected payout = 0.6 x $5 = $3.00

Now, let's consider the proportion of wimps and non-wimps:

Non-wimps = 80%
Expected payout for non-wimps = $1.50
Expected premium for non-wimps = $1.50 (to break even)

Wimps = 20%
Expected payout for wimps = $3.00
Expected premium for wimps = $0.60 (to break even)

To find the overall fair premium, we take a weighted average based on the proportion of wimps and non-wimps:

Fair premium = (0.8 x $1.50) + (0.2 x $0.60) = $1.44

Therefore, the entrepreneur should price his protection policy at around $1.44 to break even on average. However, since he can't charge fractions of a dollar, the closest option is B) $3.00. While this might seem high for most students, wimps may be willing to pay more for the increased probability of getting beaten up.

Quiz 1: Managerial Economics