ProbSet5_ProblemSet - AEM 331 Problem Set #5 Due 4/18/08 1....

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AEM 331 Problem Set #5 Due 4/18/08 1. Assume a franchise is to be auctioned off where market demand is: 102 Q P = - . Suppose there are just two firms competing for this franchise. One firm’s cost function is 1 ( ) 100 C Q Q = + while the other firm’s cost function is 2 ( ) 12* C Q Q = . The franchise is auctioned off using a modified English auction where the firm offering the lowest price for service wins the franchise. a. Who will win the franchise? b. What will the winning bid be? 2. Continuing with question 1, suppose the local government decides to issue the franchise to the firm that offers the biggest fee. An English auction is used where the firm offering the biggest payment to the local government wins the franchise. The franchise owner is free to charge any price that it likes. a. Who will win the franchise? b. What will the winning franchise fee be? c. What will price be? 3. Which of the methods described in questions 1 and 2 should a local government use if it wants to:
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ProbSet5_ProblemSet - AEM 331 Problem Set #5 Due 4/18/08 1....

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