Question 48 5 pts The California Department of Transportation {Caltrans} is looking to replace an aging highway overpass. The work requires closing two lanes of the highway. which causes trafc delays. and hence ontime completion of the project is critical. If the contractor who is awarded the project works diligently, the project is completed on time with probability 0.9. However. the contractor can slack off to save $10M in overtime costs, in which case the project is completed on time with probability 0.1. Caltrans offers a contract that consists ofa base payment and a bonus for on-time completion. Assume that the base payment is large enough so that the contractor would sign the contract given any of the bonuses listed below. Of the bonuses listed below. which is the smallest that still motivates the riskneutral contractor to work diligently? Select the single, best answer to the question. a] $5M b) $7M c) $9M d} $11M 00000 e) $13M Question 47 5 pts Consider a driver with wealth of $20,000. With 1% probability, he will get into an accident that does $15,000 of property damage. When there is no possibility of declaring bankruptcy, an uninsured driver must pay the full cost of the accident. However, with the possibility of ling for bankruptcy, an uninsured driver can protect $10,000 of his wealth (i.e., he has to pay only $10,000 of the damage caused by the accident}. If the driver buys full insurance and gets into an accident, his insurer must pay the full $15,000 in property damage, regardless of whether the driver declares bankruptcy. This is the only cost to the insurer [i.e., there are no xed costs]. Assume that the driver's utility of having wealth to is , and that there is just one insurance company. Which of the following statements is true? Select the single, best answer to the question. O a) If the driver cannot le for bankruptcy, the insurer can make positive expected prot selling full insurance to the driver. However, this is no longer true if the driver can le for bankruptcy. O bl lithe driver can le for bankruptcy, the insurer can make positive expected prot selling full insurance to the driver. However, this is no longer true if the driver cannot le for bankruptcy. O cl Regardless of whether the driver can le for bankruptcy, the insurer won't be able to make a positive expected prot selling him full insurance. 0 d) Regardless of whether the driver can le for bankruptcy, the insurer will be able to make a positive expected prot selling him full insurance. 0 e] More than one of the above statements could be true. Question 46 5 pts You are one of 10 bidders participating in a sealed-bid auction for a nice bottle of scotch. You know youryaluation is exactly $500. Which of the following statements is correct? Select the single, best answer to the question. a] In a rstprice auction. there exist opponent bids such that you would end up strictly better off bidding $600 than bidding $500. b) In a rstprice auction. there exist opponent bids such that you would end up strictly better off bidding $400 than bidding $500. c) In a second-price auction, there exist opponent bids such that you would end up strictly better off bidding $600 than bidding $500. d} In a secondprice auction. there exist opponent bids such that you would end up strictly better off bidding $400 than bidding $500. e) In a rst-price auction, regardless of your opponents' bids, you can't end up strictly better off than you would be had you bid $500. Question 45 5 pts Suppose two types of consumers are interested in buying subscriptions to The Economist: Professionals and Students. If The Economist doesn't price-discriminate, it sets a prot-maximizing uniform price, which turns out to be so high that only Professionals subscribe. The Economist has asked you to determine whether demographic price discrimination might increase prots. You determine that under the proft-maximizing price-discrimination scheme, Students should receive a discounted subscription. Now, consider the following sentence, which is missing three phrases: Relative to the situation under the prot-maximizing uniform-pricing scheme, under the prot maximizing price-discrimination scheme, the price paid by Professionals will , the prots made by The Economist will , and total consumer surplus will . Which of the following sequences of phrases (placing the rst phrase in the rst blank, etc.) would make the sentence correct? Select the single, best answer to the question. O a] fall; stay the same; rise 0 b] stay the same; rise; fall 0 c) stay the same; rise; rise 0 d} rise; stay the same; fall C) e} rise; rise; fall D Question 44 5 pts Wharton startup Dagne Dover wants to price-discriminate for its two customer types-Luxury and Budget. To do so, it creates two products: a High-End handbag that closes with a fancy metal buckle and a Low-End handbag that closes with a simple leather strap. Customer valuations for the handbags are given by the following table. High-End bag Low-End bag Luxury customer $150 $100 Budget customer $120 $90 Dagne Dover would like Luxury customers to buy the High-End bag and Budget customers to buy the Low-End bag. Which of the following pricing strategies will accomplish this goal? Select the single, best answer to the question. O a) High-End: $129; Low-End: $89 O b) High-End: $139; Low-End: $99 O c) High-End: $149; Low-End: $89 O d) High-End: $139; Low-End: $79 O e) High-End: $109; Low-End: $89D Question 41 5 pts Consider two firms that sell undifferentiated products for which the demand is linear. Assume that both firms have the same constant marginal cost and no fixed costs. . Let TM denote the profit either firm would earn if it were the only firm in the market. You should assume TM is positive. . Let To denote the profit each firm would earn in the two-player, simultaneous-move Cournot game. . Let Tz denote the profit either firm would earn if it chose its quantity as the Leader in the sequential-move Leader-Follower game. Which of the following relationships holds? Select the single, best answer to the question. O a) TO