Changing Market Conditions - Essay Example

Auction Part 2 Price effects In a market place, a buyer faces constant changing market conditions. At times, the prices of the goods will increase while at other times the price of the goods will tend to decrease. In other occasions, the prices will be affected by a change in policy whereby the government introduces subsidies on some goods and also new taxes are imposed. These conditions lead the change of consumer consumption, in the maximization of spendable income (Kagel 1993). Positive The positive price effect is a measure of change in consumers optimal consumption combination. This is as a result of a change in the price of an individual commodity, for example, a change in good X (PX), which is a normal good. The price of alternative good, Y (PY) while the consumers income remains constant A decrease in the price of a good translate to an increased consumption of the product. From the budget constraint PL1, the optimal use is at point e1 whereby the end user buys OX1 units of commodity X and OY1 units of product Y. The optimal consumption combination is located on a lower indifference curve U1. In the event that the price of commodity X falls, the buyer will tend to buy more of the good, budget constraint hence becomes flatter. The optimal consumption is now at point e2, whereby one buys OX2 units of X and OY2 units of Y. The consumer’s total utility, therefore, increases with the decrease in the price of the good with the optimal consumption combination at the indifference curve U2. Negative Price effect This measures changes in buyer’s optimal consumption combination as a result of changes in the price of one commodity, say the price of good X (PX), which is an inferior good. The price of another good, say good Y (PY) and consumers income remaining constant. Question 2:2 Part 3: 1 a) A market is a collection of consumers and producers, where consumers determine the demand and producers control the supply. In a competitive market, it is best understood in proper economic theory, where they depend on the numbers of both buyers and sellers available. In a market where the numbers of sellers drop to only two sellers, the economy is referred to as a duopoly market the price of the goods will fall below the optimal level. This is as a result of the tag war between the organization and sellers in the market. The sellers will try to win the available customers by providing a conducive price. (Jean 1991) b) A market with a single seller and multiple buyers is a monopoly. The prices in such kind of a market tend to rise above the optimal price of the commodity due the forces of demand and supply of the goods. With many buyers competing for a single commodity, the seller tend to raise the price to discourage or control the flow of the goods. c) Auctions play a prominent role in the theory of exchange as they remain one of the simplest and most familiar means of price determination in the absence of intermediate market makers. In addition, auctions serve as valuable illustrations, and one of the most prominent applications, of games of incomplete information, as bidders private information is the main factor affecting strategic behavior. With only one seller the buyers are uncertain of the supply information thus the rise in the price of the commodity. Part 3 2. Loser pay winner experiments auction With risk, averse buyers in loser pay winner auctions, the high and second bid auctions have a tendency to generate altered expected returns. In the subsequent bid action, the payment by the winning buyer is autonomous of his bid. Therefore, the bidder will continue to bid their reservation values. However, in the high bid auctions, the risk averse buyers place a lower marginal valuation on larger gains. To understand the implications of this is easiest to consider the open action equivalent of the high bid action (Kagel 1993). Taking an example of the Dutch auction the auctioneer calls out successively lower prices each subsequent time, this clearly explains why the bidder will normally change their mind towards wanting to bid way beyond the value although they previously refused to do so at the commencement of the bidding process. This is because the bid price will repeatedly get lower each time the auctioneer call out for bidders. The resulting bids, therefore, higher on average. This conclusion holds regardless of the preannounced price, the high bid auction yields greater expected revenue than the second bid action. b) Many strategic circumstances can be perceived as competitions where participants compete for payoffs. Contests have a unifying ‘all-pay’ property: Participants’ efforts or investments are sunk, regardless of whether they win a prize in the competition or not. The most widely studied case is the ‘first price’ payment rule, where players pay their cost of effort, regardless of winning. Bush and many other American citizens deemed the attack on Iraq as primitive as the American stood to lose much more in the war the accrued benefit that was being derived (Kagel 1993). A majority of the American soldiers died in the war bring it to more loss than the benefit accrued. c) The British colonies were established to be moneymakers for their colonial masters. The British government put tough restrictions on how their colonies spent their money so that they could control their economies. The British imposed tax duties on imported goods to discourage the importation of a foreign good into these colonies. This ensured that the colonies only bought goods from England. England placed these taxes as a pay-off for to cover about 1/3 of the cost incurred by the British military troops permanently in their American colonies; this was a payoff for the services rendered by the British government in the American colonies for their future safety. 1. False 2. False 3. False 4. True 5. True 6. False 7. True 8. True 9. True References Fudenberg, Drew; Tirole, Jean (1991) Game Theory MIT Press W. Vickrey. Counterspeculation, auctions, and competitive sealed bids. Journal of Finance J. H. Kagel and W. Vogt. Buyer’s bid double auctions: Preliminary experimental results. In D. Friedman and J. Rust, editors, The Double Auction Market: Institutions, Theories and Evidence, Santa Fe Institute Studies in the Sciences of Complexity, chapter 10, pages 285–305. Perseus Publishing, Cambridge, MA, 1993 Read More