Corporate Finance > EXAM > ECO 4170 Game Theory with Applications in Corporate Finance | Assignment 2 Solution (All)

ECO 4170 Game Theory with Applications in Corporate Finance | Assignment 2 Solution

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ECO 4170 Game Theory with Applications in Corporate Finance | Assignment 2 Solution University of Ottawa ECO 4170 8U2. Consider again the case of the 2011 Citrus. Almost all cars depreciate over time, and so it is with the Citrus. Every month that passes, all sellers of Citrus - regardless of type - are willing to accept $100 less than they were the month before. Also, with every passing month, buyers are maximally willing to pay $400 less for an orange than they were the previous month and $200 less for a lemon. Assume that the example in the text takes place in month 0. Eighty percent of the Citruses are oranges, and this proportion never changes. (a) Fill out three versions of the following table for month 1, month 2, and month 3. Willingness to accept of sellers Willingness to pay of buyers Oranges Lemons (b) Graph the willingness to accept of the sellers of oranges over the next 12 months. On the same figure, graph the price that buyers are willing to pay for a Citrus of unknown type (given that the proportion of oranges is 0.8). (Hint: Make the vertical axis range fro 10 000 to 14 000.) (c) Is there a market for oranges in month 3? Why or why not? (d) In what month does the market for oranges collapse? (e) If owners of lemons never experienced depreciation, i.e., they were never willing to accept anything less than $3000, would this affect the timing of the collapse of the market for oranges? Why or why not? In what month does the market for oranges collapse in this case? (f) If buyers experienced no depreciation for a lemon, i.e., they weree always willing to pay up to $6000 for a lemon, would this affect the timing of the collapse of the market for oranges? Why or why not? In what month does the market for oranges collapse in this case? (a) Fill out three versions of the following table for month 1, month 2, and month 3. Month 0 Willingness to accept of sellers Willingness to pay of buyers Oranges $12,500 $16,000 Lemons $3,000 $6,000 Month 1 Willingness to accept of sellers Willingness to pay of buyers Oranges $12,400 $15,600 Lemons $2,900 $5,800 Month 2 Willingness to accept of sellers Willingness to pay of buyers Oranges $12300 $15,200 Lemons $2,800 $5,600 Month 3 Willingness to accept of sellers Willingness to pay of buyers Oranges $12,200 $14,800 Lemons $2,700 $5,400 (b) Graph the willingness to accept of the sellers of oranges over the next 12 months. On the same figure, graph the price that buyers are willing to pay for a Citrus of unknown type (given that the proportion of oranges is 0.8). (Hint: Make the vertical axis range fro 10 000 to 14 000.). Let t denote the month. For t = 0, 1, ..., 12, the willingness to accept of the seller of an orange is willingness to accept for sellers For a buyer, the willingness to pay for an orange in month t is �� b[1, t_] := 16 000 - 400 t For a buyer, the willingness to pay for an orange in month 0 is

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