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This information relates to Questions 6 and 7. Suppose two firms
have substitutable ideas for a desirable innovation. Per period
values are given by v1=$500 and v2=$450, and
up-front R&D costs are given by c1=$80 and
c2=$20. If the firms’ values and costs are public
information, known to everyone, which of the two firms should a
sponsor choose to develop the innovation?

Firm 1

Firm 2


Suppose the firms’ values and costs are private information,
known only to the firms, and the sponsor uses the Vickrey Auction
format (discussed in class) to choose the optimal idea. If firm 1
misrepresents its idea by bidding $450 and firm 2 reports its
social surplus honestly, what will be firm 1’s payoff? Do not
include dollar symbols.