Module 2 (Strategies for Assessing & Increasing Demand) Flashcards
In which of the following scenarios is the winner of the auction LEAST likely to suffer from the winner’s curse?
A - A son winning his mother’s favorite painting to give her for her birthday.
B - A diamond dealer placing the winning bid for a set of stones on the diamond exchange.
C - A construction company bidding on a contract to build a new apartment complex.
D - A restaurant bidding on a prime NYC location.
A - A son winning his mother’s favorite painting to give her for her birthday.
In this auction, the buyer’s valuation of the product does not depend on others’ valuations and/or information.
In which of the following cases would a seller be least likely to use an auction to determine the price of an item?
A - The item is unique and the seller is not certain what it is worth.
B - Buyers’ valuations of the item are interdependent.
C - The seller is aware of each buyer’s valuation of the item.
D - The seller overpaid for the item initially and is trying to recover some of his losses.
C - The seller is aware of each buyer’s valuation of the item.
An art collector is bidding on a statue that would complete a collection he is trying to assemble. The statue is being sold in a Vickrey (sealed second-price) auction.
The collector should place a bid:
A - less than his willingness to pay for the statue.
B - equal to his WTP for the statue
C - greater than his WTP for the status
D - slightly above his estimate of what the highest bid from another participant will be.
B - equal to his WTP for the statue
This maximizes the chances of the collector winning the auction without creating any risk that he will overpay.
After running an advertising campaign intended to increase sales of its line of dishwashers, an appliance store notices that consumer WTP for its dishwashers seems to have increased. However, the store has not captured any market share from its competitors.
Which of the following might explain this outcome?
A - The advertising campaign focused on negative features of competitors’ dishwashers rather than the positive features of the store’s own product.
B - The advertising campaign focused on the advantages of owning a dishwasher, but did not mention the store’s specific brand of dishwasher.
C - The advertising campaign alerted consumers that the store was having a major sale on dishwashers, without emphasizing the desirable features of the dishwashers.
D - Dishwashers exhibit network effects, and the store is therefore operating in a “winner-take-all” industry.
B - The advertising campaign focused on the advantages of owning a dishwasher, but did not mention the store’s specific brand of dishwasher.
The campaign increased WTP for dishwashers in general, but without specifically promoting the store. Other dishwasher sellers have probably profited from the campaign in the same way.
A traveler’s willingness to pay for a room in a hotel in a remote location is $70. The traveler’s willingness to pay for a hot breakfast is $10. The traveler views hotel rooms and hot breakfast as complementary products.
What is most likely the traveler’s willingness to pay for a room in a hotel that includes complimentary hot breakfast?
A - Less than $70
B - $70
C - $80
D - More than $80
D - More than $80
Since the two goods are complementary, the traveler’s WTP for a bundle of the two should be higher than the sum of WTP for the two individual products.
Which of the following pairs of products would have a cross-price elasticity of demand that is negative? (Select all that apply.)
A - High-speed internet access and an online streaming service for TV shows
B - Jelly and jam
C - Dishwashers and houseplants
D - Pens and pads of paper
E - A Porsche 911 and a BMW i8
A - High-speed internet access and an online streaming service for TV shows
D - Pens and pads of paper
A large beer company previously had a yearly budget of $50 million per year for advertising but increased the budget to $60 million in order to run a commercial during the Super Bowl. That year revenues increased by 1%.
Should the beer company continue with the increased advertising budget?
A - No, the 1% increase in revenue is smaller than the 20% increase in expenditures.
B - No, because the company had an AED of .05 which is too low for advertising to be a strong investment.
C - Yes, since the AED of .05 was positive, it makes sense to continue with the increased budget.
D - Yes, but only if the increase in revenues was greater than the increase in expenditures.
D - Yes, but only if the increase in revenues was greater than the increase in expenditures.
If the original total revenue was $1 billion, then the increase in revenue would have been 1% of that, so $10 million. This is equal to the increase in advertising expenditures. Thus if original revenues were greater than $1 billion, it makes sense to keep the increased budget.
144
There are 443*3 possible combinations of features for a total of 144.
For example, if you look only at phones with 4MP cameras, 16GB of storage, and a price of $100, there are four possible phones—one with each screen size.
A restaurant sells salsa and guacamole, each of which can be eaten with the tacos that the restaurant sells. The manager of the restaurant is not sure whether salsa and guacamole are substitutes or complements. However, after increasing the price of guacamole from $2.00 to $2.50, the manager notices that daily salsa sales rise by 5%.
What is the cross price elasticity of salsa and guacamole, and what can the manager conclude about their relationship?
A -1/5. Salsa and guacamole are substitutes.
B 1/5 Salsa and guacamole are substitutes.
C -5. Salsa and guacamole are complements.
D 5. Salsa and guacamole are complements.
B 1/5 Salsa and guacamole are substitutes.
Cross price elasticity is the percent change in quantity demanded of one good (+5%) divided by the percent change in price of the other good (+25%). A positive cross price elasticity indicates that the goods are substitutes.
A landlord is renting out an apartment and has three prospective tenants. The first tenant is willing to pay $1200/month, the second tenant is willing to pay $3000/month, and the third tenant is willing to pay $2000/month. Each potential tenant knows the valuations of the other tenants.
Of the following methods of renting the apartment, which would generate the greatest revenue?
A - A sealed first-price auction
B - A sealed second-price (Vickrey) auction
C - A fixed price of $1900/month
D - A fixed price of $2200/month
D - A fixed price of $2200/month
At this price, the apartment will be rented for $2200/month. This is the only option in which the apartment is rented for significantly more than $2000/month.
Describe how an open outcry auction (or English auction) works.
- Buyers submit increasing bids.
- The consumer with the highest WTP wins, typically bidding (and paying) just above the consumer with the 2nd highest WTP.
Describe how a second-price auction (or Vickrey auction) works.
- Buyers submit sealed bids. The highest bidder wins the auction, and pays the 2nd highest bid.
- Bidders are motivated to bid their exact WTP, to maximize their chance of winning the product without the risk of overpaying.
Describe how a sealed-first price auction wins.
- Buyers submit sealed bids.
- The highest bidder wins the auction and pays what he or she bid.
- Bidders might be motivated to bid below their WTP in order to ensure that if they win, they will capture some value.
What does the Revenue Equivalence Result state?
Under certain general conditions, each type of auction should result in approximately the same revenue for the seller.
This revenue will be approximately equal to the 2nd highest bidder’s WTP.
True or false: auctions are useful tools for sellers who have little information about consumers’ WTP.
True
