Question #1
Taking into account that we have a business where units take time to produce and storage is expensive, we need to identify where a huge number of these units can be produced and stored in order to keep up with the future demand . However, it is not possible to do this, since storage cost is significantly high. Hence, the total cost is directly proportional to the storage cost. Companies are doing everything possible to reduce the total production cost according to the theory of inventory management.
Companies are also facing lost sales if the demand unexpectedly goes up and companies cannot increase the production at the last moment, since it takes a lot of time to produce units (Rasmussen, 2013). That is why it is important to have a tradeoff between the inventory holding costs and the time. If a company maintains its market position using a significant quantity of units, it has to produce and store these units. In such case, this company will be able to sell these units to customers whenever it is needed, unlike other competitors on the market. However, if this company maintains its position using lowered prices, it has to decrease the price in order to increase the demand.
It is possible to reach high margins, can increase prices and maintain its market position using quantity, so it can sell the same good for a higher price when the competitors run out of product. Such increase in quantity may result in higher storage cost. Thus, companies on this market have to compete in quantity.
Question #2
Winner’s curse can be defined as an unexpected situation that generally happens in common value auctions. In such case, the winner pays more than they should have actually paid. The reason of this curse is that the price of the sold asset is lower than the bid of the winner or the value of this asset is lower than the anticipated value of this good by the winner (Brams & Taylor, 1992).
It is important to identify the difference between different types of value auctions – common value auction and private value auction. The difference is that goods on private value auctions have a different value for each individual and the value is different from the value on the market. On the other hand, on common value auction goods of the same value for each individual are being sold and the value of this good is the same as its value on the market (Brams & Taylor, 1992). For example, if an individual wants to buy a house on an auction, it will be a common value action. However, if a well-known painting is being sold on an auction, it will be a private value auction.
That is why the winner of a common value auction might be on the losing side, if he pays a price higher than the actual value of the purchased good. It generally happens that competitors do everything possible to make others place higher bids, so that they win the auction but pay more than the asset costs.
Winner’s curse is common only for common value auctions, since on private value auctions there is no point to overpay for the asset because the value of this asset is different for each individual. Individuals will not pay more, if they know that the paid price will not justify their need of this asset.
Question #3
Versions A, B, and C of the bill are to be passed There are three versions of bill to be passed, A, B and C. The preferences of 12 members of a committee are as follows:
1: Four people prefer version A to version B to Version C.
2: Four people prefer version B to version C to version A.
3: Four people prefer version C to version A to Version B.
Game theory can be applied to determine the winner (Owen, 2013). The chairman of this committee can hold 2 alternatives against each other and then the winning alternative will be held with the last one.
Situation #1
If Bill A is being voted against Bill B, then:
Type 1, people vote for A
Type 2 people vote for B
Type 3 people vote for A
Thus, Bill A gets 8 votes and Bill B gets 4 votes. In such case, Bill A is the winner
Now, A competes against C
Type 1, people vote for A
Type 2 people vote for C
Type 3 people vote for C
Thus, Bill A gets 4 votes and Bill C gets 8 votes. In such case, Bill C is the winner
The overall winner is Bill C
Situation #2
If Bill A is being voted against Bill C, then:
Type 1: 4 people vote for A
Type 2: 4 people vote for C
Type 3: 4 people vote for C
Thus, Bill A gets 4 votes and Bill C gets 8 votes. In such case, C is the winner
Now, Bill B competes against Bill C
Type 1: 4 people vote for B
Type 2: 4 people vote for B
Type 3: 4 people vote for C
Thus, Bill B gets 8 votes and Bill C gets 4 votes. In such case, Bill B is the winner
The overall winner is Bill B
Sitation #3
If Bill B is being voted against Bill C, then:
Type 1: 4 people vote for B
Type 2: 4 people vote for B
Type 3: 4 people vote for C
Thus, Bill B gets 8 votes and Bill C gets 4 votes. In such case, bill B is the winner
Now, Bill A competes against Bill B
Type 1: 4 people vote for A
Type 2: 4 people vote for B
Type 3: 4 people vote for A
Thus, Bill A gets 8 votes and Bill B gets 4 votes. In such case, Bill A is the winner
The overall winner is Bill A
Based on the result, we can make a conclusion that there might be 3 different winners, based on the choice of bills for the first round. In such case, the chair can influence the result according to his preferences. The main point is not to put the preference into the first round.
Works cited
Brams, Steven J., and Alan D. Taylor. Two stage auctions II: commom-value strategies and the winner's curse. New York: C.V. Starr Center for Applied Economics, Faculty of Arts and Science Dept. of Economics, 1992. Print.
Owen, Guillermo. Game theory. Bingley, UK: Emerald, 2013. Print.
Rasmussen, Svend. Production economics: the basic theory of production optimisation. Heidelberg: Springer, 2013. Print.
