Ecns 300
Fall 2013
Final Midterm
PLEASE NOTE: Your answers to these questions must be delivered to your instructor BEFORE 12:00
Noon on Wednesday, December 11, 2013. You may e-mail your answers as an attachment in one of the
following formats: pdf, doc, docx, rtf. No other formats will be accepted. Do not compress or encrypt
the file; if a single file is too large to send as a single attachment, break it into separate answers and
send each answer as a separate file. Alternatively, you may hand deliver your answers to McD 258. If
someone is not in the office, slide your answer sheets under the door. AS ALWAYS, FOLLOW REQUIRED
FORMATS for your answers.
Follow Directions carefully. Where you have a choice of questions to answer, clearly indicate which
question(s) you are submitting for grading. There are three parts (2 pages) to this exam.
Part I: Answer either 1 or 2 (choose one):
1. Do problem 7 on page 435 of your textbook.
2. Do problem 12 on page 436 of your textbook.
Part II: Answer either 3 or 4 (choose one):
3. You are the owner of a firm that is soliciting bids for a contract to supply an important
component in a product you manufacture. You have stated the exact specifications for the
component and the quantities you anticipate purchasing, so the primary issue for you in
deciding the winning bid will be the unit price at which each supplier commits to sell you the
components. Due to size and shipping constraints, it will be practical to only buy from a local
supplier, but because there will be strong economies of scale in the production of the
component, you believe that it will be wise to award a single long-term contract to a local
producer so they can factor the savings from the scale economies into their bids. You know of
five local producers who have the capability of producing this component and have received
confirmation from each that they are interested in submitting a bid. However, you have a
concern: it is rumored that the owners and senior management of these companies meet
frequently at social events and these firms are the subjects of a Department of Justice
investigation into collusion and bid rigging associated with bids for a local government project.
You are trying to think of a way to structure the bidding protocol to minimize the likelihood of
getting a collusive bid. Someone suggests that you consider an “open bidding process” where
you commit to making complete details all bids—the winning bid as well as the losing bids—
public when you announce the winner. Another advisor suggests just the opposite: only
announce the winner and do not disclose any details about any of the bids. Whose advice
should you follow—or does it matter?—if you want to minimize the chance that the companies
will successfully collude in submitting bids for your project? Explain fully.
4. Do problem 5 on page 478 of your textbook.
Part III: Answer any two of the following three questions:
5. For each of the following games, indicate (a) if there is a dominate solution— if there is one,
state what it is and explain how you got it (make your explanation VERY clear if finding a
dominant solution involves iterative dominance), and (b) all Nash equilibriums.
Player 2
Left Middle
Up
1,1
3,4
Center 2,4
2,5
Down 3,3
0,4
II
Right
2,1
8,1
0,9
Player 1
Player 1
I
Player 2
Left Middle
Up
1,1
5,0
Center 0,5
4,4
Down 0,0
0,0
Right
0,0
0,0
3,3
6. There are two firms that are considering entering a new market and must make their decision
without knowing what the other firm is going to do. Once a decision is made, it becomes a
commitment that the firm cannot back out of or change after learning what the other firm will
do. Unfortunately, the market is only big enough to support one of the two firms. If both firms
enter the market, then they will each lose $10,000. If only one firm enters the market, that firm
will earn a profit of $50,000 with the other firm breaking even (i.e., earning $0 profit).
Obviously, if neither firm enters the market, neither will earn any profits in that market.
Draw the normal form game layout for the above problem and identify any dominant and pure
Nash equilibrium solutions as well as any mixed-form Nash equilibrium strategies. If there is a
mixed-form Nash equilibrium strategy, state it precisely. Show all work.
7. Do problem 17 on page 524-5 of your textbook. Note: There are 5 positions along the beach.
The uniform distribution of beachgoers mentioned in the text refers to this: There are 200
beachgoers in each position. Do not worry about their location within a position. Hence if Ben
is in Position 1 and Jerry is in Position 2, all 200 beachgoers in Position 1 will buy exclusively
from Ben regardless of how close to the border between 1 and 2 that Jerry is. So, in this
situation, Ben gets 200 customers and Jerry will get 800. If a beachgoer is in a position that
equally distant from the two vendors, half will go to Ben and the other half will go to Jerry. So, if
Ben is in Position 1 and Jerry is in Position 3, Ben will get 300 customers (200 in Position 1 and
half of those in Position 2) while Jerry will get 700 customers (all of those in Positions 3, 4, and 5,
and the other half from Position 2)
If you have questions about the interpretations of these questions, you may e-mail me. Restrict your
questions to interpretative or clarification issues ONLY. I will not respond to questions asking for answer
hints. FURTHERMORE, you have until 5 p.m. on Tuesday to ask these type of questions. Questions
received after 5 p.m. on Tuesday will not be answered.