In an auction, the winning bidder often ends up as an overly optimistic loser because of O a. political pressure. b. asymmetric information. O c.a lack of perfect information. O d. a lack of common knowledge. O e. zero marginal costs.

3. Assume a single firm and a single consumer in a market. The firm's prod- uct may be either high or low quality and is of high quality with probability A. The consumer cannot observe quality before purchase and is risk neutral. The consumer's valuation of a high-quality product is UH; her valuation of a low-quality product is UL. The costs of production for high (H) and low (L) quality are CH and C₁, respectively. The consumer desires at most one unit of the product. Finally, the firm's price is regulated and is set at p. Assume that VH > P> VL > CH > CL. (a) Given the level of p, under what conditions will the consumer buy the product? (b) Suppose that before the consumer decides whether to buy, the firm (which knows its type) can advertise. Advertising conveys no information directly, but consumers can observe the total amount of money that the firm is spend- ing on advertising, denoted by A. Can there be a separating perfect Bayesian equilibrium, that is, an equilibrium in which…

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