Kelleyschool of Business

G570 Quiz Number 2 Page 1 of 5

G570 Quiz #2

KelleySchool of Business

John W. Maxwell

Fall 2001

Name: ______

INSTRUCTIONS:

This quiz has three sections answer all parts of each section. The value of each section is clearly indicated. The sum of the values is 40, and you have 40 min to complete the quiz. Allocate your time appropriately.

1. [15 pts]

John and Jane are the only students taking G571 a new advanced game theory class. Since there are only two students, and the class has not been taught before the professor notes that the students will be graded on their relative performance.

A)Consequently the students face a prisoner’s dilemma in terms of hours spent studying for the course.Explain this statement briefly.(3 pts)

John and Jane have group incentives to collude in decreasing the amount of time they each spend studying, but once they enter into that agreement they each have an individual incentive to cheat and study more. Further each has a dominant strategy to study more. These two conditions result in a prisoner’s dilemma.

B)John tells Jane that he has decided to take on the demanding role of president of the Finance Club. Use a diagram to fully explain John’s moves and discuss both the direct and indirect effects of his decision. You may use the back of this page for your answer. (12 pts.)

The diagram you want is one of strategic complements where hours of study for John and Jane constitute the axes. Thus, both reaction functions are upward sloping. By becoming president of the finance club, John is taking a strategic move which (if his hours are the Y axis) shifts his reaction function to the left. That is for any amount of hours John would have studies (for a given amount of hours Jane studied) John will now study less. The strategic response of Jane will be to also study less. This helps John because they are graded relatively.

2. Strategic Move? [10 pts.]

Air Canada warns workers

By KEITH McARTHUR

From Monday's Globe and Mail

Air Canada has warned its unions that it is looking to cut costs by at least 20 per cent as soon as possible, as this month's terrorist attacks continue to take a harsh toll on the airline industry.

The target raises the likelihood that Air Canada will quickly follow the lead of U.S. carriers, which have aggressively been cancelling flights, grounding planes and laying off tens of thousands of workers.

"By the end of the week, you're going to see a lot of really long faces at that airline," said one union executive who asked that his name not be used. "There's a lot of people who are going to lose their jobs that have worked for the airline for a really long time."

Air Canada spokeswoman Laura Cooke said Sunday that the Montreal-based carrier is looking to cut labour costs by $500-million a year. Last year, Air Canada spent $3-billion on labour and benefits.

______

Following moves by US Airlines, Air Canada is seeking a 4 billion dollar cash infusion from the Canadian federal government. Is the above announcement by Air Canada a strategic move? Why or Why not?

This is not a strategic move unless the CEO has a highly valued reputation for following through on all his statements no matter what. However this statement is one that is easily reversible. If conditions change and people start flying again it will be painless for Air Canada to reverse its position. Even if thing didn’t get better it easy to reverse. The CEO can say “We always want to serve our customers well. So we decided to cut less.
3. The State of South Dakota [15 pts.]

STATE OF SOUTH DAKOTA
PURCHASING & PRINTING OFFICE
523 EAST CAPITOL AVENUE
PIERRESOUTH DAKOTA 57501-3182

COMPUTER PRODUCT CONTRACT CHALLENGE PROCESS FOR VENDORS

The State of South Dakota will use the following challenge process when purchasing computer products.

The challenging vendor must submit pricing that is lower than that indicated for every item on the current contract. All items on a particular contract must be included in the challenge, unless otherwise stipulated.

If a challenging vendor submits a computer product that is identical (same make & model, etc.) to the current contract product (the standard), the challenger’s price will not be disclosed to the current contract vendor prior to award of the new contract. If the challenger is submitting a computer product that is considered "equal" to the current standard, but is not exactly identical, the current contract vendor will be allowed to see the challenger’s price and have an opportunity to meet or beat that price.
Challenging vendors must accept the terms and conditions of the current contract in order to submit a challenge.

The computer product being provided by the vendor holding the current contract will be considered the standard. The specification for the standard is located on the Internet at Vendors interested in competing for a contract for a particular computer product may contact the Office of Purchasing & Printing, 523 East Capitol Avenue, Pierre, South Dakota57501-3182, or phone 605/773-3405.

If there are any questions regarding this process, please feel free to contact the Office of Purchasing & Printing.

*Not necessarily the current standard

The State of South Dakota is trying to extract low prices from suppliers.

A)Will their policy necessarily work? (10 pts.)

Not necessarily. Imagine a situation in which firms have substitute but not identical products. The policy might discourage firms from submitting competing bids because they know that the current supplier has a chance to re-bid at a price lower than they submitted. If this is likely they will not bother to bid at all. Thus, the initial bidder can raise his bid without fear of losing the contract.

B)Explain the significance of the bold face print. (5 pts.)

Any intelligent answer is correct. Its an attempt to reduce bid-rigging, but I personally don’t believe it would work.