Economics 7 Week Challenge Series 2022– Challenge 2: Buying and Sel...

Hi Everyone,

Welcome to the Economics 7 Week Challenge Series for 2022. Over 7 weeks, in the months of August and September, I will be running an economics challenge series. This series will consist of 7 challenges. Five of these challenges will be returning from last year’s Challenge Series and two of them are completely new. Below are the list of challenges.

Challenge 1: Auction
Challenge 2: Buying and Selling Game (Business Version)
Challenge 3: Tax Game (New)
Challenge 4: Game Theory
Challenge 5: Make Me Happy
Challenge 6: Buying and Selling Game (Original Version)
Challenge 7: Pick-a-door (New)

Each challenge could reward winners with as much as 60 Hive. The value of the prize will depend on the level of participation. For each new participant, the prize will increase by 5 Hive. This will continue until 60 Hive is reached (12 participants). The first 12 participants will also receive a 50% upvote from this account. In addition to the prize money, the top few participants will be given points. These points will be used to determine the overall challenge series winner. This winner may receive as much as 80 Hive. The value of the prize will equal the sum of the number of participants across all challenges. This will continue until 80 Hive is reached.

For more information on the challenge series and the upcoming challenges, I recommend that you read my post Spectrumecons Seven-Week Challenge 2022 (Coming Soon) and watch my video.

Welcome to Challenge 2: Buying and Selling Game (Business Version)

The Buying and Selling Game (Business Version) and the original version of the game are regular contests that I run on a monthly basis. Below, for the business version of the game, are links to recent contests and their results posts and videos.

If you want even more information, the game is introduced in my post/video 'Buying and Selling Game (Business Version) Explanation Video'.

How to play?

The ‘Buying and Selling’ Game (Business Version) involves two simple steps.

Choose the quantity of each good you want to buy or make.
Choose the selling price of each good you bought or made.

All the information you need to know to play the game is provided in the question; i.e. no external research is required as all costs and demand estimates are hypothetical.

All entries must be made in the comments section of this post.

Each account is only permitted one entry.

Objectives of the game

The objective of the game is to make the highest profit from the sale of the goods you have bought or made. If two participants make the exact same profit, the participant that entered first wins.

Game assumptions

Each good has 100 potential customers. Each customer can buy up to 6 items of a particular good if he or she values the goods above the selling price (i.e. has a willingness-to-pay higher than the selling price). Each customer is only interested in one type of good. Therefore, selling more types of goods increases the potential number of customers. For examples selling three types of goods grants access to 300 potential customers.

Demand for the goods for each customer is determined using triangle distributions. The question provides the minimum, maximum, and mode willingness-to-pay for each good. Demand is further adjusted for diminishing marginal utility using a fixed percentage adjustment. The demand curve is the summation of demand of all potential customers. See example of triangle distribution below. A sample demand curve is shown later in the post.

Triangle Distribution

Each customer has diminishing utility (diminishing willingness-to-pay as more goods are bought) for each good. For example, a customer may have a willingness-to-pay of $1.00 for the first item, $0.80 for the second item, $0.60 for the third item, $0.40 for the fourth item, $0.20 for the fifth item, and $0.00 for the sixth item. The question will state this diminishing utility as 20% (i.e. 0.2/1 = 20%), which is applied linearly. If a participant prices the good at $0.50, the customer will buy three items, as the customer values the fourth item below $0.50 (i.e. $0.40).

The business will have overhead costs, which need to be deducted from the budget before goods can be bought. There are zero transaction and transport costs.

If some goods remain unsold, they will be treated as being wasted, which is equivalent to being sold for $0. This could occur if a participant prices a good too high.

What information is provided?

All the goods that can be bought in the game are provided.
All costs (i.e. costs to buy/make goods and overhead costs) are provided.
Any special purchasing requirements are provided. For example, a good may need to be bought in fixed quantities.

How are the results of the game determined?

A Microsoft Excel Model is used to determine the demand of each good. The costs, quantities bought, quantities sold, and prices will be used to calculate the profits made by each participant. In the results post, the calculation of the demand and profits will be presented in a video.

Challenge Prizes

The total prize for this challenge could reach as high as 60 Hive. The number of participants determines the value of the prize. For every entry, the prize is increased by 5 Hive until a value of 60 Hive is reached. The winner will receive 2/3 of the prize and second place will receive 1/3. The first 12 entries will be given upvotes. The winner of this challenge will be given 20 points, second place 10 points, and third place 5 points. These points will be tallied at the end of the challenge series to determine the overall winner. An additional 5 Hive and 5 points can be won if the winning participant obtains a higher or equivalent profit to the model’s built in estimator.

Let the challenge begin

For this challenge, participants will be running a bath products business. Participants will be able to sell three types of bath products.

Shampoo
Body Wash
Bubble Bath

The participants will only be able to purchase shampoo, body wash, and bubble bath in batches of 10. The costs of purchasing each batch, the average cost per bath product and daily overheads are provided in the tables below.

Cost Information

Note: Budget includes Daily Overhead. If the budget is $150 and the daily overhead is $600, there is $450 remaining to purchase bath products.

The parameters to determine demand are provided in the table and graphs below.

Demand Information

Note: The graphs for the triangle distribution are based on the minimum, maximum, and mode prices for the bath product a customer buys. The demand curve is adjusted to include diminishing utility expressed in the last column of the table. This will increase the elasticity of demand.

It has been assumed each type of bath product has 100 potential customers. Each customer will potentially buy a maximum of 6 bath products of a particular type. Therefore, it is possible a maximum of 600 of each bath product could be sold. The Figure below contains a sample of a possible demand curve that could be generated by the model using the parameters described in this question.

Possible Demand Curve

Note: This is a sample demand curve for bubble bath. The actual demand curve will be determined in the results post.

Entry format

For this challenge, I expect to see entries made in the following format:

Shampoo
Quantity: XXX Selling Price: XXX
Body Wash
Quantity: XXX Selling Price: XXX
Bubble Bath
Quantity: XXX Selling Price: XXX

Example:

Shampoo
Quantity: 80 (8 Batches) Selling Price: $4.30
Body Wash
Quantity: 60 (6 Batches) Selling Price: $3.50
Bubble Bath
Quantity: 100 (10 Batches) Selling Price: $9.80

The closing date and time for this challenge is 6PM coordinated universal time (UTC) 21/08/2022. Responses after this time will not be accepted. The answers will be provided in the results post along with the video containing the generation of demand and profits using the model.

I hope everyone has fun and enjoys this second challenge. If you have any questions, feel free to ask in the comments section. I look forward to your participation in the next challenge. It will be available in a few days.

If you want to read any of my other posts, you can click on the links below. These links will lead you to posts containing my collection of works. These 'Collection of Works' posts have been updated to contain links to the Hive versions of my posts.

Economics 7 Week Challenge Series 2022– Challenge 2: Buying and Selling Game (Business Version)