Choice International, a business-format franchisor of hotels, launched Cambria Suites to serve an upscale market segment. Choice International is concerned that franchisees maintain a consistent standard. It has contracted with a quality assurance specialist, LRA Worldwide, to conduct anonymous inspections of each Cambria Suites hotel twice yearly.

1. Using a relevant graph with ‘effort’ on the horizontal axis, illustrate a franchisee’s marginal benefit and marginal cost of effort and explain its choice of effort.

2. How does the franchisee’s effort benefit other franchisees? Explain in terms of an externality. On your graph for (a), identify the economically efficient effort.

3. Why would one Cambria Suites franchisee want Choice International to inspect other franchisees?

4. Consider the deviation between the franchisee’s choice of effort and the economically efficient effort. Would this be smaller or larger in a chain of hotels that are all in a single city than in an international chain?

Answer rating: 100% (QA)

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