Managerial Economics Keti Tskhadadze

Quiz N10
Name and Surname Mohamed sobhy attia attia hagag ug_id 201779

Open Questions (Each question is worth of 0.2 points):

1. What is "asymmetric information"?
Answer :market situation in which one party in a transaction has more information than the other party.
Leads to many problems in markets:
– too much or too little production
– difficult contracting
– possible fraud
– market may disappear

2. What is "adverse selection"?

Answer : is prior to transaction, one party may know more about the value of a good than the
other
– Possible ways to reduce adverse selection: imposition of a government edict requiring all
to purchase insurance, or screening by insurance companies.

Tests:
3) Moral hazard is the
A) outcome of a Prisoner's Dilemma.
B) result of market signaling.
C) risk associated with a Dutch auction.
D) risk that one party to a contract may alter its post-contract behavior to the
detriment of another party.

4) Asymmetric information represents a market situation in which

A) all parties to a transaction possess less than full information.
B) one party in a transaction has more information than the other party.
C) some information possessed by the parties in a transaction may be false.
D) a zero-sum game exists.

5) The Prisoner's Dilemma is an example of

A) market signaling.
B) a zero-sum game.
C) a non-zero sum, non-cooperative game with a dominant strategy.
D) adverse selection.

Tasks Solving: (1 point)

6. The following matrix shows the payoffs for advertising game between Coke and
Pepsi. The firms can choose to advertise or to not advertise. Numbers in the matrix
represent profits; the first number in each cell is the payoff to Coke. (Numbers in
millions.)
Coke (rows) / Pepsi Advertise Don't Advertise
Managerial Economics Keti Tskhadadze
Quiz N10

(columns)
Advertise (10, 10) (500, -50)
Don't Advertise (-50, 500) (100, 100)

a. Explain why this would be described as a Prisoner's Dilemma game

b. b. Explain the probable outcome of this game.

Answer : because as you see in above table The first number in each square refers to
the payoff for the row (horizontal] player, here coke. The second number in each square
refers to the payoff for the column (vertical) player, here pepsi. The numbers represent
the profit foe Pepsi and Coke.
In this game:
 The players are Pepsi and Coke.
 The strategies available each player:
 coke, as the row player, can choose either Advertise or Don't
Advertise.
 Pepsi , as the column player, can choose either Advertise or Don't
Advertise.

 The payoffs each player receives:

 If coke chooses Advertise and Pepsi chooses Advertise, coke earns 10 and
Pepsi earns 10.
 If coke chooses Advertise and pepsi chooses Don't Advertise, coke earns l 500
and pepsi lose 50.
 If coke chooses Don't Advertise and pepsi chooses Advertise, coke lose 50 and
pepsi earns 500.
 If coke chooses Don't Advertise and pepsi chooses Don't Advertise, coke earns
100 and pepsi cams 100

Each player gains a lot from advertising when the other player does not advertise
because the advertiser gains a larger share of the market. If both advertise, the gain is
less than if both don't advertise because advertising costs money.