Consumer surveys indicate that 40% of newspaper readers read automobile ads and 5%
of those who read the ads actually purchase automobiles. On the other hand, 50% of
magazine readers read automobile ads but only 3% of those who read the ads actually
buy a car. Among those who do not read either newspaper or magazine auto ads, 1%
buys cars anyway. Sixty percent of the population reads newspapers, while 20 percent
primarily read magazines. Compute the overall percentage of the population that
purchases automobiles in a given year. (To aid your analysis, you might wish to draw a
decision tree listing appropriate probabilities for the three aforementioned reading
segments.)
What is a reserve price? State its purposes and explain how it is advantageous from the
seller’s point of view.
A petrochemical company must decide whether to fill a specialty order for one of its
customers. Its cost (and therefore profit) depends on the quality of the raw material it
has on hand to make the chemical. The firm expects to earn $50,000 from the order if
the material is high quality (H) but will lose $30,000 if it is low quality (L). The firm’s
engineers estimate these probabilities to be .32 and .68 respectively. Before making its
decision, the firm can test the material with one of two outcomes, ‘favorable’ or
‘unfavorable.’ A favorable test increases the chance of H to .5, while an unfavorable
result reduces it to .2. The likelihood of a favorable test is .4. Determine the expected
value of this test.
What do we mean by a first mover advantage? Why is it an important strategy? Give an
example to illustrate your answer.
In the Cournot model of duopoly, explain whether the quantities chosen by the firms are
strategic complements or strategic substitutes.
Give an example of the ‘lemons’ market and how the problem of information
asymmetry can be overcome in the market.