Managerial Economics Assignment-                                      

1. Suppose there are two firms in the market for computer processors.  Intel is considering developing a new technology that would reduce the costs of production.  The development of this technology would cost Intel a fixed cost of C.  If Intel develops the technology AMD can adopt it for a smaller cost of C/2.  If Intel innovates and AMD does not then Intel will earn $20 in revenue and AMD will earn $0.  If they both adopt the technology they will each earn $15 in revenue.  If neither firm uses the new technology they each earn $5 in revenue.

a) Draw the extensive form of this game?

b) For what range of possible set-up costs (C) will AMD have an incentive to adopt the technology if Intel innovates?

c) For what range of possible set-up costs (C) will Intel develop this technology?

d) If C=15 what is the subgame perfect equilibrium of this game?

2. An (honest) stamp collector is considering selling one of her prize stamps.  Based on some very insightful market research she knows that there are two bidders and each bidder just wants to add the stamp to their own private collection and is not worried about resale value.  Depending on their mood the day of the auction each bidder is equally likely to value the stamp at $10, $20 or $30.  (The realized values are not correlated across the two bidders, i.e. they are independent, private values.   Also assume everyone, including the seller, is risk neutral and if there is a tie we can flip a coin to determine the winner.)

a) If the stamp collector values the stamp at $11, what is her expected profit from using a sealed-bid second-price auction?

b) Suppose the stamp collector decided to run a first-price sealed-bid auction, rather than a second-price sealed-bid auction.  Why might the bidders be more comfortable with a first-price auction, especially if they can't verify the seller is honest?

c) Again assuming the stamp collector values the stamp at $11, what is her expected profit in the first-price sealed-bid auction?

d) Now suppose that the bidders wanted to resell the stamp after the auction, but they are unsure of how much they can sell the stamp for in the market.  Each bidder respects their opponents valuation of the stamps market value but has no information about the valuation (i.e. there is no longer an equal probability of $10, $20 or $30).  What type of auction could the stamp collector choose to maximize her revenue from the auction? Explain.

3. Suppose that Sven has a VW Cabrio that he would like to sell.  Unfortunately, the speedometer on the car is broken and in need of repair.  Sven is accustomed to driving the car in this condition and it is worth $3,000 to him fixed or not.  Sven would like to sell the car to move up to something with a little more muscle.  Jeff and only Jeff is willing to buy the car for $3,500 as is or for $4,500 if the speedometer is fixed.  Both Sven and Jeff know each other's' values and that they can get the car repaired at cost by Passport Motors for $600.

a) Sven is thinking about having the car fixed before he sells it.  What problem might Sven run into if he has the car fixed first?

b) What are two ways that Sven could avoid this problem?

c) From the point of view of society (i.e. maximizing total surplus) does it matter if the car is sold?  Why or why not?

4. Could we calculate U.S. GDP by adding up the total revenue for all domestic businesses in a single year? Explain.

5. Consider the recent tensions between Russia and the Ukraine.  The response from the "West" (U.S., several Europe nations, etc..) has been to impose sanctions upon Russia.

a) For ease of exposition, assume that the U.S. bans imports of all goods and services from Russia.  Assume that is the only policy action by either the U.S. or Russia.  What is the direct impact this trade policy might have upon the U.S. economy? Be sure to consider the level of GDP as well as the balance of payments.

b) Suppose the value of the US/Ruble falls as a result of the conflict. What impact might this movement in the foreign exchange market have upon the U.S. level of GDP as well as the balance of payments?