1. Suppose a seller (i.e. the principal) wants to sell his good to a buyer (i.e....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
1. Suppose a seller (i.e. the principal) wants to sell his good to a buyer (i.e. the agent) by pricing it optimally. Suppose the seller's utility function is given by t-q and the buyer's utility function is given by 0q/3-t whenever q 0 is the amount of good sold to the buyer in exchange of t 0 amount of transfer made to the seller. Suppose the seller does not observe the buyer's taste parameter 0, but it is common knowledge that this parameter can be either 3 with probability v = 1/4 or 0 = 1 with probability 3/4. Suppose that the seller offers a menu of contracts (i.e. quantity-transfer pairs) after the buyer observes her type. 1 = (a) Write down the seller's optimization problem by clearly stating the objective function and the constraints. (b) Simplify this problem by identifying binding and non-binding constraints, and making necessary substitutions. (c) Solve the simplified problem; that is, find an optimal contract as a quantity-transfer pair offered for each type of the buyer. (d) Calculate the expected utility of the seller. Find each type of buyer's information rent. (e) Find the minimum value of such that the shutdown policy becomes optimal given all other parameters. 1. Suppose a seller (i.e. the principal) wants to sell his good to a buyer (i.e. the agent) by pricing it optimally. Suppose the seller's utility function is given by t-q and the buyer's utility function is given by 0q/3-t whenever q 0 is the amount of good sold to the buyer in exchange of t 0 amount of transfer made to the seller. Suppose the seller does not observe the buyer's taste parameter 0, but it is common knowledge that this parameter can be either 3 with probability v = 1/4 or 0 = 1 with probability 3/4. Suppose that the seller offers a menu of contracts (i.e. quantity-transfer pairs) after the buyer observes her type. 1 = (a) Write down the seller's optimization problem by clearly stating the objective function and the constraints. (b) Simplify this problem by identifying binding and non-binding constraints, and making necessary substitutions. (c) Solve the simplified problem; that is, find an optimal contract as a quantity-transfer pair offered for each type of the buyer. (d) Calculate the expected utility of the seller. Find each type of buyer's information rent. (e) Find the minimum value of such that the shutdown policy becomes optimal given all other parameters.
Expert Answer:
Answer rating: 100% (QA)
a The sellers optimization problem is Maximize Etq t1q1 1t2q2 Subject to IC constraints 1... View the full answer
Related Book For
Posted Date:
Students also viewed these economics questions
-
123 Compare the purely graphical properties of these two notations, and the ways in which the graphical properties of each display correspond to the information structure being defined. Describe...
-
can someone solve this Modern workstations typically have memory systems that incorporate two or three levels of caching. Explain why they are designed like this. [4 marks] In order to investigate...
-
Problem 5-47 Amortizing Loans and Inflation (LO3) Suppose you take out a $108,000, 20-year mortgage loan to buy a condo. The interest rate on the loan is 5%. To keep things simple, we will assume you...
-
The manager of the Cranston Division of Wynn Manufacturing Corporation is currently producing a 20 percent return on invested capital. Wynn's desired rate of return is 16 percent. The Cranston...
-
Determine whether each pair of lines is parallel, perpendicular, or neither. 2x = y + 3 and 2y + x = 3
-
Mr. Jenkins, this is typical question: Do you feel that I have treated you fairly in this interview?
-
Absorption and variable costing. (CMA) Osawa, Inc., planned and actually manufactured 200,000 units of its single product in 2009, its first year of operation. Variable manufacturing cost was $20 per...
-
What type of failure has occurred when a new-product introduction loses money for the company when accounting for development, marketing, and production costs?
-
Write a C++ program that use exec Linux command: 1- When the program starts, you should display for the user the two options as follow: 1- Linux command line to remove the directory (dirfolder) from...
-
Pola Sommers, a massage therapist, needs 5 ounces of a 22% lavender oil solution. She has only 4% and 40% lavender oil solutions available. How many ounces of each should Pola mix to obtain the...
-
Explain why capital and fiat money are not perfect substitutes and discuss what this implies for the rate of return on capital relative to the rate of return on fiat money
-
In this program data comes in pairs, say height and weight: .data pairs: .word 5 .word 60, 90 .word 65, 105 .word 72, 256 # number of pairs #first pair: height, weight .word 68, 270 .word 62, 115...
-
Analyze how market microstructure theory seeks to explain stock price formation and evaluate how it differs from the efficient market hypothesis.
-
If the exchange rate is one dollar to 10 South African rand, how many dollars does it take to buy an item that costs 400 rand?
-
Find the viscosity of Acetic acid at 300K.
-
If (x) 0 on the interval [a, b], the definite integral gives the exact area under the curve between x = a and x = b.
-
Kiplinger and Intuit are two rival firms in the tax- software industry. Each faces a choice for the coming year between developing a simple tax- advice program or a comprehensive one. The matrix...
-
Phil and Cathy are roommates who are taking the same economics class. This morning Phil wakes up and is trying to decide whether to go to class or not. He knows that if Cathy is going to go to class...
-
Suppose all firms in a competitive industry are operating at output level for which price is equal to long- run marginal cost. True or false: This industry is necessarily in long- run equilibrium.
-
Describe a job in which you think an employee recognition program might be an effective means for changing and improving employee behaviour. Explain how you would design the program and how you would...
-
Describe a situation in which you think an employer could use organizational behaviour modification and an employee recognition program to improve or correct employee behaviour. Can you anticipate...
-
A supervisor in a textile factory observes that one of her employees is violating a safety rule that could result in severe injury. What combination of reinforcement, punishment, and extinction could...
Study smarter with the SolutionInn App