Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Macroeconomics Expert

Exercise 1

Determine whether the following statements are right or wrong

• “As long as consumers are willing to pay the positive price for a good, the larger is quantity produced, the greater is the total surplus from trade.”

• “Consider a monopolist with a constant average cost. The higher is elasticity of demand at the selected monopoly price, the higher is the monopolist's profit-to-revenue ratio.”

• “If for a particular market, the concentration ratio CR4 (the combined market share of the 4 largest firms) is 1, its Herfindahl index is at least 0.25.”

• “Consider a market with n firms engaged in the Bertrand competition. These firms have in general dissimilar marginal costs however any number of them may also have equivalent marginal costs. There is no such a structure of marginal costs that more than one firm in this industry earns a positive profit.”

• “Assume the local fixed telecommunications company is a monopoly. It costs the company €2 per month to offer voice messages service to a customer. Elasticity of demand for voice messages service is 4/3 (at any price). Then the phone company will make additional money if it does offer its service at €5 per month than if it provides this service at €8 per month.”

Exercise 2

The sole producer of the anti-diarrhoea drug STOP supplies two retail pharmacies in an isolated village. The two pharmacies compete à la Cournot in a market classified by an inverse demand function

p (Q ) =   100 - Q

Where p is the price consumers pay for a package of pills. The costs the pharmacies have per package sold are €40 plus the amount they have to pay for a package to producer of STOP.

Assume that the marginal cost of STOP is €12 per package and that there are no fixed costs.
Moreover, assume that STOP uses a two-part tariff with a price per package equivalent to S p and a fixed amount f  which both pharmacies need to pay to STOP to become its eligible suppliers.

a. Assume that the fixed amount f is so low that both retailers remain in market. What is the joint equilibrium quantity of the two pharmacies that will be offered as a function of S p?

b. What values of f and S p maximize the profits of STOP?

Exercise 3

Pancakes Creations is considering franchising its exclusive brand of pancakes to stall-holders on Zandvoort beach, which is 5 kilometres long. Pancakes Creations estimates that on an average day there are 1000 sunbathers evenly spread along the beach and that each sunbather will purchase one pancake per day provided that they cost no more than €5. The effort of getting up from the sand to get a pancake and return to the sun bed is estimated at 25 cents for every ¼ kilometre the sunbather is from a stall. Each pancake costs 50 cents to make and it costs €40 per day to operate a stall no matter how many pancakes it makes.

a. Assume that Pancakes Creations award a franchise to only one stall-holder. This beach holder locates its stall in the central point of the beach. prepare the stall's demand function for pancakes as a function of price.

b. Assume that the franchise contract requires the stall-holder to cater to all consumers on the beach. What price will the stall-holder charge and what will be its profits?

c. The stall-holder is unsatisfied with the profits it makes. He argues that his profits may rise if he raises the price and subsequently serves only part of the beach. What price must the stall-holder charge in order to maximize the profits? Is he right – will the profits increase because of the new pricing policy?

The fixed franchise fee provides Pancakes Creations to reap a substantial part of the stall-holder's profits. To raise the profits further, the company award a franchise to one additional stall-holder and requires both stall-holders to locate their stalls symmetrically on the beach (that is, one stall will be located at 1/4 and the other one at 3/4 of the way along the beach). Assume that Pancakes Creations fixes the price of pancakes in the franchise contract is such a manner that the two stalls together serve the entire beach.

d. What will be the quantity sold by each stall? Are the combined stall-holders profits higher than the profits a single stall-holder makes according to your answer under c.?

Exercise 4 

Consider a worker in a firm that has to decide how hard to work. The worker’s effort e, with 0 e ≤≤1, has a disutility for the worker equal to -e/2. The worker gets wage 0 < w < 1. The worker’s utility is therefore

U = w - e2/2

That is, the wage net of the effort cost. The production of the firm is e and the good is sold at price 1.

a. The worker chooses effort e to maximize own utility (subject to the constraint 0 ≤ e ≤1). What is his optimal choice of effort e?

The firm doesn’t like the above outcome and decides to monitor the worker with probability P to induce the worker to put forth more effort. If the firm monitors, it catches the worker shirking with probability1- e, after which it fires him. If the worker is caught shirking and is fired, he receives 0 wage. If the firm doesn’t monitor the worker or doesn’t fire him, he gets wage w. The worker maximizes the anticipated wage payment minus the effort cost.

b. prepare down the anticipated utility of the worker and solve for the utility maximizing effort e. How does the worker’s optimal effort depend on P? Give intuition.

c. Assume the firm’s monitoring costs are equivalent to γP2. What is the profit-maximizing level of monitoring? (Hint: The firm pays the wage w with probability 1 – P + Pe.)

We now return the situation without monitoring. Suppose now, however, that the worker is altruistic toward the firm. That is, the worker maximizes

W - e2/2 + e α, where the last term is the product of the altruism coefficient α (∈ α  (0,1]) and the production of the firm.

d. Solve for the utility maximizing effort. How does the worker’s effort change when the altruism coefficient α raises?

e. Assume the firm can choose between two applicants for the job: a selfish worker who selects effort according to your answer under c. and an altruistic worker who is insensitive to monitoring and selects effort according to your answer under d. Which worker will the firm hire?

(Hint: the answer based on the monitoring costs parameter γ and the altruism parameter α.)

Bonus assignment

The Wikipedia website comprises an item on ‘perverse incentives’. It describes a perverse incentive as “an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers.” The website offers various striking exs of perverse incentives. For illustration, “19th century palaeontologists travelling to China employed to pay peasants for each fragment of dinosaur bone (dinosaur fossils) that they produced. They later discovered that the peasants dug up the bones and then smashed them in many pieces, greatly reducing their scientific value, to maximise their payments.”

a. Illustrate the perverse incentive.

b. What makes the incentive perverse?

c. How could the incentive makers improve the incentive?

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M91692

Have any Question? 


Related Questions in Macroeconomics

What is the payoff for a put option with a strike price of

What is the payoff for a put option with a strike price of $50 if the stock price at expiration is $65? Please provide detail of how you got your answer.

Economic development of latin americain the late 1980s and

Economic Development of Latin America In the late 1980s and early 1990s Latin America privatized most state enterprises. What was the rationale for privatization and what were some expected benefits and costs? What have ...

For the term paper you are required to pick a current

For the term paper, you are required to pick a current economic topic that relates to the material we have covered or will cover in this course. You will research and find an article that covers the topic you have chosen ...

Topic 1 privacy policiesmany countries require

Topic 1: Privacy Policies Many countries require organizations that collect personal information to publish a privacy policy that will outline how the company will handle and use this information. Find a copy of the priv ...

How would the assumption of perfect information in the

How would the assumption of perfect information in the theory of perfect competition render advertising utterly ineffective?

Discussion - why the rapid developmentwhat do you feel has

Discussion - Why the Rapid Development? What do you feel has accounted for the rapid development of countries like South Korea, China, Brazil, and India? Explain your reasoning.

The danish central bank is committed to maintaining an

The Danish central bank is committed to maintaining an exchange rate of 7.46 krone per euro exchange rate with a band of 2.25% on either side of this central rate. Under current conditions in the foreign exchange market, ...

When installing utp cable for a horizotnal link it is very

When installing UTP cable for a horizotnal link, it is very important to minimize crosstalk. Explain what crosstalk is, why crosstalk can be a problem, and how it is minimized when terminating UTP cables.

Jesus told us not to worry about tomorrow because we are to

Jesus told us not to worry about tomorrow because we are to focus on today and we are not promised tomorrow. (Mt. 6:34) Does this mean we should spend as much as we want and not save any for the future? Explain.

The annual property tax in richardson county is 150 for

The annual property tax in Richardson County is $1.50 for each $100 of a property's assessed value. The county clerk wants you to create an application that will display the property tax after he enters the property's as ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro