Instructions:

This exam consists of two sections. You are required to answer one question from the first section and two from the second section, for a total of three questions.

The exam is open-book open-notes. You may use whatever other resources you wish (with citation), though the exam is intended to be done without reference to sources other than those used in the course. However, you should NOT discuss the exam with your classmates or anyone else - this is an individual exam, and your work should be entirely your own.

Several of the questions below request opinions or speculation. Grades will NOT be based on your opinions, but rather on the quality of your argument, your ability to present those arguments, and the extent to which you can connect your reasoning with concepts and tools that we have learned in this course. I believe that all of these questions have fairly close and apparent connections to the concepts and tools of our course. While individual answers will vary, I anticipate that each question on this exam will take approximately one hour to complete, and that your answers will typically take up about one page (formatted like this one). If you are significantly off from that (in either direction), you are probably taking a different approach to the question than the one that I had intended.

Section 1 Question:

1. A manager is waiting for information about the success of a new strategy. There are three possible outcomes (great, good, bad), which have equal probabilities of occurring. Half of the time (independent of the outcome), the manager does NOT have the information in time to disclose it in the annual report. If the firm has a great outcome, the firm will have a value of $30. With a good outcome, the value is $10 and with a bad outcome the value is $5. The manager wants to maximize the firm value, and believes that the market correctly understands the probabilities and rationally assesses whatever information the manager provides. The manager is not required to disclose any information, but cannot disclose incorrect information (i.e., the manager can't say the result was great when it was only good, or when he really doesn't know).

i) Is no disclosure at all a possible equilibrium? Why or why not?

ii) Is full disclosure a possible equilibrium? Why or why not?

iii) What disclosure policy (or policies) could be an equilibrium?

iv) How do your answers to the above change if the probability of NOT knowing the information falls from 50% to 10%?

v) Provide a brief (one paragraph) intuitive explanation of your answer to part iv).

Section 2 Questions (choose two of the four questions to answer):

2. Read the attached WSJ article about the relationship between European car manufacturers and firms that specialize in testing emissions and fuel efficiency for the manufacturers. For purposes of this question, focus on the relationship between these two parties, rather than on the specific rules. What do you think are the primary causes of the current problem?

The article suggests (directly or indirectly) at least two possible solutions to the current problem:

a. Have the government test cars chosen from car owners and rental agencies
b. Make the rules more specific, e.g., cars must be fully equipped, or must be driven on actual roads

Suggest a third possible solution, and then discuss the pros and cons of the three solutions.

3. The attached Washington Post article discusses a fairly well known problem; namely that hiring (and other) decisions frequently demonstrate a bias against "ethnic and gendered names". For purposes of this question, assume that such bias (which may be conscious or unconscious) exists, and that it is harmful to everyone involved (the candidate being considered, the firm doing the hiring and the broader society). Consider three possible regimes:

a. Candidates names must appear on their resumes (this is the current practice)
b. Candidates may choose whether or not their name appears on the resume
c. Candidates names may NOT appear on their resumes (David Cameron's initiative)

Compare and contrast the advantages and disadvantages of the three possible regimes, in the context of the Washington Post article. From a regulators perspective (in this case the British government), which approach would you choose?

Attachment:- Final Exam.rar