Question

Answer the following questions:

1) You are online placing an order for a car. The order is placed at the manufacturer’s web site and the car is made to your specification. At the end of the process, the car is priced at $25,000 and you have to choose the dealership you want to pick up your car from. There are two choices available to you and both are identical in every respect. The first dealership is 5 miles away and requires a $25,000 cashier’s check from you upon delivery. The second dealership is 5 miles away and also requires a $25,000 cashier’s check. However, the second dealership gives you $5 cash back on the spot. As a rational mazimizer which dealership should you choose?


2) Air America and Omega Airlines secretly reach an agreement to keep their prices high. Therefore, each airline has two possible alternatives, charge high prices or charge low prices. The appropriate annual payoffs are presented in the matrix below. First numbers in each cell refer to Air America while the second one refers to Omega Airlines.

                                                                            Omega Airlines
                                        -----------------------------------------------------------------------
                                             High prices                                        Low Prices
                                        -----------------------------------------------------------------------
                High prices      $200 mill. ; $250 mill.                  $120 mill. ; $300 mill.

Air America                      ----------------------------------------------------------------------

                Low Prices       $280 mill. ; $110 mill.                  $180 mill.; $180 mill.
                                        ----------------------------------------------------------------------
A) If this were a onetime situation, what would be the most likely outcome of this scenario?
B) Assume this is a repeated situation and both airlines are capable of standing the effects of the first blow. Omega Airlines, accordingly decides to move first and then follow a “tit-for-tat” strategy. What do you expect to be the outcome in this market?
C) Assume this is a repeated situation and both airlines are capable of standing the effects of the first blow. Omega Airlines, accordingly decides to move first and then follow a “tit-for-tat” strategy. What do you expect to be the eventual outcome in this market?


3) Assume the final match of the Soccer World Cup is held in your town and you paid $200 for a ticket to the game. The maximum price you would pay for such a ticket is $500. On the day of the game, as you want to enter the stadium, someone offers you $1,000 for your ticket. As a rational maximizer what should you do?


4) You purchased a ticket to a concert for $30 a month ago. Last week someone invited you to a party on the same night as the concert. You would much rather go to the party than the concert. You have tried unsuccessfully to sell the concert ticket. As a rational maximizer what should you do?

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1. The rational individual always choses to maximize their total utility. In this case, the consumer is confronted with identical choices and so they would consider the alternative that offers highest utility. Since the marginal utility of money is always positive (Sasmita, 2010), any form of monetary income would increase the utility of the consumer, irrespective of the magnitude of wealth. Cash back from the dealership is a type of discount and form of transfer of wealth from the dealer to the buyer....

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