Q1 (3pt.): There are 100 people who want to sell used cars and 100 people who

want to buy a used car. Assume they are risk-neutral. 80 cars are ‘plum’ and 20

cars are ‘lemon.’ The owners of a plum is willing to part with it for $2000. The

owners of a lemon is willing to part with it for $900. The buyers are willing to pay

$2400 for a plum and $1000 for a lemon.

When the buyers cannot verify at the point of purchase whether a given car is a

plum or a lemon, they have to accept a common price p. Determine the possible

range of p, and the numbers of each type traded.

Q2 (17pt.): A single unit of a good is to be sold via an auction. There are two

bidders, A and B. They are assumed to be risk-neutral. The seller knows that

there are five possible values of willingness to pay, $100, $200, $300, $400 and

$500. Bids are also restricted to those values.

Suppose A’s willingness to pay is $400 whereas B’s willingness to pay is $200.

(1) Consider that the unit is sold via rst-price auction in which ties are broken

by a coin flip.

Write down the payoff matrix, and find all the pure-strategy Nash equilibria. (6pt.)

(2) Conisider that the unit is sold via second-price auction in which ties are

broken by a coin flip.

Write down the payoff matrix. What is the dominant-strategy equilibrium of this

auction game? (6pt.)

(3) (innovative) Conisider that the unit is sold via all-pay auction in which ties are

broken by a coin flip. In all-pay auction, each bidder has to pay her bid, regardless

of winning or losing.

Write down the payoff matrix, and find all the pure-strategy Nash equilibria (if

any). (5pt.)

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