Consider a business in which units take time to produce and storage can be expensive.

Answer the following questions. Each of your answers should be an essay of up to 250 words (with a typical font and spacing this will be up to 1 page). Refer to the lectures and the texts as needed.

1. Consider a business in which units take time to produce and storage can be expensive. Would you expect such a business to compete by setting quantity or by setting price?

2. Explain the nature of the winner’s curse and why it occurs in a common-value auction. Why is the winner’s curse not a problem for private-value auctions?

3. Suppose that three different versions of a bill (A, B, and C) appear before a committee of 12 people.

Four people prefer version A to version B to Version C.

Four people prefer version B to version C to version A.

Four people prefer version C to version A to Version B.

Because there is no majority, the chair of the committee will first hold a vote between two of the alternatives, then the winner of this vote will face the remaining bill version. Show using game theory that if people vote their preferences, the chair effectively chooses which version will be the winner.

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