(Optional) Revisit Oceania’s problem in Exercise S11 to see how the optimal menu found in that…

(Optional) Revisit Oceania’s problem in Exercise S11 to
see how the optimal menu found in that problem compares with some alternative
contracts.

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(a) If you decided to offer a single fixed-price contract
that was intended to attract only the low-cost BMA, what would it be? That is,
what single (Q, M) pair would be optimal if you knew BMA was low cost?

(b) Would a high-cost BMA want to accept the contract
offered in part (a)? Why or why not?

(c) Given the probability that BMA is low cost, what
would the expected net benefit to Oceania be from offering the contract in part
(a)? How does this compare with the expected net benefit from offering a menu
of contracts, as found in part (j) of Exercise S11?

(d) What single fixed-price contract would you offer to a
high-cost BMA?

(e) Would a low-cost BMA want to accept the contract
found in part (d)? What would its profit be if it did?

(f) Given your answer in part (e), what would be the
expected net benefit to Oceania from offering the contract in part (d)? How
does this compare with the expected net benefit from offering a menu of
contracts, found in part (j) of Exercise S11?

(g) Consider the case in which an industrial spy within
BMA has promised to divulge the true per-unit cost, so that Oceania could offer
the optimal single, fixed-price contract geared toward BMA’s true type. What
would Oceania’s expected net benefit be if it knew that it was going to learn
BMA’s true type? How does this compare with parts (c) and (f) of this exercise
and with part (j) of Exercise S11?

 

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