12/8/2015 Mastery Quiz 1 – 2 |

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Mastery Quiz 1 – 2

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Review Related Lesson (/learn/negotiation/home/week/2)

 1.

Preamble: This is the first mastery quiz for the course. The questions on this quiz are meant to test whether you
have watched all the material and understand the concepts presented in Modules 1 – 2. If you are reading this, I
hope that means you’ve had a chance to look over the questions in advance (provided in the Preview of Mastery
Quiz 1 – 2) and so you know what to expect.

Q1. What is the pie?

The pie is the benefit the negotiating parties could get if they work together.
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 The pie is the difference between the benefit the negotiating parties could get if they work together
and the sum of the benefits each party could get on its own.

Well done!

The pie is the difference between the benefit one party can get on its own and the benefit the other
party can get on its own.

3.14159…

 2.

If Abe and Bea reach an agreement, they can create 12 together. If they don’t, Abe can create 3 on his own
and Bea can create 1 on her own. What is the pie?

Well done!
That’s right. The pie is how much more the two parties can create by working together compared to what they can create without an agreement. Therefore the pie is 12 - (3 + 1) = 8.

 3.

In the above scenario, how much should Abe get?

 7

Well done!
That's right. If Abe and Bea split the pie (8), Abe will get 3 + 4 = 7.


4.
Andrea and Beth are dining at a fine restaurant. There is a bottle of 2009 Grgich Hills Chardonnay on the menu
and the price is $100. To keep things simple, albeit unrealistic, assume the restaurant only sells whole bottles
and this is the only wine they carry.

Andrea would be willing to pay $110 to drink the whole

bottle. Andrea would be willing to pay $90 to drink half

the bottle.

Beth would be willing to pay $80 to drink the whole

bottle. Beth would be willing to pay $50 to drink half

the bottle.

They would like to share a bottle if it makes sense to do so (and if they can agree on how to divide the costs). To see if
it makes sense, what is the pie, in dollars?

ore the two parties can create by working together compared to what they can create without an agreement. If they don’t reach an agreement, what would Andrea do on her own? What wo
 value do they create? How much more value do they create together compared to the result with no agreement?
If you are still stuck, you might want to review the Sea Corp. video.

Acceptable responses
$30
If they don’t reach an agreement, Andrea will get $10 and Beth will get nothing. If they do reach an agreement, they will jointly have created $40 of surplus ($90 +

30
If they don’t reach an agreement, Andrea will get $10 and Beth will get nothing. If they do reach an agreement, they will jointly have created $40 of surplus ($90 +


5.
In the question above, how much should Andrea pay, in dollars, if they split the pie?

so they should split the pie. If you’ve calculated the pie correctly, then both Andrea’s and Beth’s gain from sharing the bottle will be half the pie. For Beth, that means she pays that amount le
 A common mistake here is to leave out the gain Andrea can get on her own. Remember that if they don’t reach an agreement, Andrea will still buy a bottle of win

Acceptable responses
$65
If they split it evenly, each side will end up with $15 of the pie. Thus Beth pays $50 – $15 = $35 and Andrea pays $90 – ($15 + $10) = $65. Note Andrea starts with

65
If they split it evenly, each side will end up with $15 of the pie. Thus Beth pays $50 – $15 = $35 and Andrea pays $90 – ($15 + $10) = $65. Note Andrea starts with


6.
Recall that if Aegean and Baltic share the cost of a new software program, Aegean will benefit $100 while
Baltic benefits $200. If the software costs $100 total, how much should Aegean pay, in dollars?

e together is $200. If they work on their own, Aegean will not buy the software since the cost ($100) cancels out its benefit ($100). Baltic will buy the software for a net benefit of $200 - $100
together and working separately, is $200 - $100 = $100. The pie should be divided equally: $50/$50. Aegean and Baltic will each pay $50. Here it is in tabular form:

Aegean Baltic Total

Net Benefit: Together ------- ------ 200

Net Benefit: On Their Own 0 100 100

Pie ------- ------ 100

Total benefit each side gets when they split the pie 50 150 200

How much each pays 50 50 200

Show other acceptable response

 7.

What is the Shapley Value?

For each party in the group, it is the amount of pie created by that party joining others in the
group, averaged across all possible orderings in which parties join the group.

Well done!
Well done.

For each party in the group, it is half of the amount of pie created by that party joining others in
the group, averaged across all possible orderings in which parties join the group.
 For each party in the group, it is the maximum portion of the pie created by that party joining the
group, across all possible orderings in which parties join the group.

 8.

In the Planet–Gazette merger, the Gazette was twice as big as the Planet. If the Planet were the same size
as the Gazette, how much more of the pie would you expect the Planet to get?

No more

Well done!
The pie gets split in half, not because the Planet and Gazette are equal in size, but because the cooperation of both parties is needed to complete the merger and create the pie.

50% more

100% more

 9.
Recall in the Planet–Gazette merger case, the increased productivity from the Gazette’s know-how was worth $1
million to the Planet. Imagine the Planet could hire a consultant to improve its productivity up to the same level
as the Gazette. The cost of the consultant would be $200,000. Of course, with the merger, there is no need
for the consultant. When the Planet has the ability to hire a consultant, how much more money should the Planet
get in the merger?
 The same amount as before

ry, that's incorrect.

possibility of hiring the consultant changes the benefit that the Planet can achieve on its own without the help of the Gazette. What is the new pie and what is the Planet's new starting positi

$200,000 more

$300,000 more

$400,000 more

$500,000 more

 10.
Consider a potential merger between two hypothetical beer companies. Prior to the merger, the first, Ann Hy, is worth
$150 billion and the second, Czar Bosch, is worth $100 billion. If they merge, they will gain $30 billion in
increased value from reduced costs and additional sales (in present discounted value). Thus the combined
value of the new entity (called Ann Hy-Czar Bosch) would be $280 billion. How much more could Czar Bosch
hope to get by using the theory of the pie instead of proportional division?

$1.3 billion

$3 billion
 $5 billion

$10 billion

$10.7 billion

ch get under proportional division? Hint: Proportional division is based on the pre-merger numbers, and $100b / ($100b + $150b) = 40%. How much more does Czar Bosch get if they split the


11.
Consider an Ultimatum Game where the pie is $100. You are the receiver. What reserve price, in dollars,
maximizes your expected payout?

sn’t change what the other side will offer. Thus anything you turn down is like throwing money away. You may choose to do so out of spite or to enforce a social norm, but doing so will lowe

Show other acceptable responses

 12/8/2015 Mastery Quiz 1 – 2 |
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
12.an Ultimatum Game where the pie is $100, would you rather be:
In

the person making the offer

an to receive. You would rather be the one making the offer since that person should get more than half of the pie. The advantage of being the one receiving the offer is you can guarantee yo

the person receiving the offer

 13.

You should propose proportional division if it benefits you.

Yes

Well done!
If a proportional split leads you to get more than half the pie and the other side is willing to agree, then go ahead.

No

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12/8/2015 Mastery Quiz 1 – 2 |
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 14.

Abe and Bea each have some money to invest in a CD (Certificate of Deposit). Abe has $5,000 and Bea has
$20,000. Both are interested in making a 6-month investment at Synchrony Bank. The CD rates for Synchrony Bank
(as of July 8, 2015) are as listed below.

With 0.41% interest, Abe would get $5,010 in six months. With 0.50% interest, Bea would get $20,050 at the end
of six months.

If they pool their funds, they will be able to purchase a $25,000 CD, which pays a higher interest rate. The
0.60% interest will return $25,075 at the end of six months.

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 Obviously, Abe gets back his $5,000 principle, and Bea gets back her $20,000 principle. How should the $75
interest be divided between the two of them?

Divide up the interest according to the amount invested. Since Bea has 80% of the funds, she
should get 80% of the interest, or $60 in total. This is the same as both parties getting 0.60%
interest on their funds.

Divide the interest in two, so each gets $37.50.

Abe gets $17.50 and Bea gets $57.50.

Bea will earn $50. By coming together, they can earn $75, which is an extra $15 of interest. The two should spit this evenly, $7.50 and $7.50. Thus Abe would get $17.50 and Bea would get $
which is more than what Bea is getting. The reason is that Bea is not able to increase her payout from 0.50% to 0.60% without Abe’s cooperation. Were Bea able to find someone else with $

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