For consumers, goods A and B are complementary goods. The cost of ...

[cherise1989]

For consumers, goods A and B are complementary goods. The cost of a resource used in the production of A decreases. As a result
 
  A) the equilibrium price of B will fall and the equilibrium price of A will rise.
  B) the equilibrium price of B will rise and the equilibrium price of A will fall.
  C) the equilibrium prices of both A and B will rise.
  D) the equilibrium prices of both A and B will fall.

Question 2

Mr. Smith won a laptop in an online auction in which bidders could see each other's bid and price increased with every new bid.
 
  a) If Mr. Smith values the laptop at 400, find out his dominant strategy.
  b) Will there be a change in his optimal bidding strategy if there is an increase in the number of bidders?

[sarahccccc]

Answer to Question 1

B

Answer to Question 2

a) Mr. Smith is participating in an English auction. In an English auction, bidders can see each other's bid and price increases with every new bid. The auctioneer starts bidding at a price below every bidder's willingness to pay and asks who would like to bid. Each bidder should continue to bid until the price reaches his maximum willingness to pay for the good because he has to pay his bid if he wins. Therefore, Mr. Smith should continue bidding as long as the price is below 400. This is his dominant strategy.
b) In an English auction, the optimal bidding strategy of a bidder does not depend on the number of bidders participating in the auction. Each bidder continues to bid as long as price lies below his willingness to pay. The highest bidder wins and pays an amount equal to the second-highest bid (or slightly higher if second-highest bidder bids his highest value exactly).