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Question # 00000830
Subject: Economics
Due on: 09/17/2013
Posted On: 09/08/2013 10:55 AM

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A rm has two divisions, each of which has its own manager. Managers of these
divisions are paid according to their eort in promoting productivity in their divisions,
which is judged by comparison with other managers and other divisions. If both
managers are judged as having expended high eort," each earns \$150,000/year. If
both are judged to have expended low eort," each earns \$100,000/year. But if
one of the two managers shows high eort" while the other shows low eort," the
high eort" manager is paid \$150,000 plus a \$50,000 bonus, while the second (low
eort") manager gets a reduced salary of \$80,000. Managers make their eort decisions
independently and without knowledge of the other manager's choices.
(a) Assume that expending eort is costless to the managers and draw the payo
table for this game. Find the nash equilibrium of the game and explain whether
the game is a prisoners' dilemma.
(b) Now suppose that expending high eort is costly to the mangers (such as a costly
signal of quality). In particular, suppose that high eort" costs an equivalent of
\$60,000/year to a manager that chooses this eort level. Draw the game table for
this new version of the game and nd the Nash equilibrium. Explain whether the
game is a prisoners' dilemma and how it has changed from the game in part a.
(c) If the cost of high eort is equivalent to \$80,000/year, how does the game change
from that described in part b? What is the new equilibrium? Explain whether
the game is a prisoners' dilemma and how it has changed from the games in part
a and b.
(d) Assume now that the owner of the rm can't actually observe manager eort, but
instead determines eort based on relative output of the two divisions, meaning
that the manager with the division that produces the most is assumed to have
provided the highest eort. If the payos are the same in part c, does this change
the outcome of the game? If the managers play this game repeatedly, does it
matter whether eort is directly observable?

Min Pages: 1
Max Pages: 2
Level of Detail: Show all work
Other Requirements: The question belongs to the Behavioral Economics, so please focus on the subject, and answer everything in the question(include drawing table or drawing graph)

Tags economics

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Tutorial # 00000697
Posted On: 09/08/2013 10:56 AM
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rm_has_two_divisions.doc (41 KB)
Preview: actions xxx symmetric xxxxxx the two xxxxxxxx the same xxxxxxxx holds xxx xx Irrespective xx the action xxxxxx by M1, xx is xxxxxx xxx choosing xxxx effort, i x high effort xx a xxxxxxxx xxxxxxxx strategy xxxx both players xxxxxxx their strictly xxxxxxxx strategy, xx xxxx a xxxx equilibrium at xxxx effort, High xxxxxx with xxxx xxxxxxx earning xxxxxx The game xx this case xxxx represent x xxxxxxxxx dilemma xxxxxxxx Here both xxxxxxx have a xxxxxxxx dominant xxxxxxxx xxx the xxxx equilibrium is xxxxxx Also, the xxxx equilibrium xx xxxxxx Inferior xxxx players can xxxxx a Pareto xxxxxxxx outcome xx xxxxxxxxx low xxxxxx and each xxxxxxx 100,000 The xxxx differs xxxx xxxx in xxx in terms xx payoffs which xxxxx the xxx xxxxxxx Low xxxxxx a Pareto xxxxxxxxxxx over High xxxxxxx High xxxxxx xxx If xxx cost of xxxx effort is xxxxxxxxxx to xxxxxxxxxxxx xxx does xxx game change xxxx that described xx part x xxxx is xxx new equilibrium xxxxxxx whether the xxxx is x xxxxxxxxx dilemma xxx how it xxx changed from xxx games xx xxxx a xxx b M1 xxxxxxxxxxxxxxxxxxx 70000120000, 80000Low80000, xxxxxxxxxxxxx 100000 xxxxxxxx xx (manager xx division1) If xx chooses to xxxxxx high xxxxxxx xxxx M1 xx better off xxxxxxx in low xxxxxx since xx xxxx earns xxxxxx as against xxxxxx if he xxxx in xxxx xxxxxx And xx M2 chooses xx put in xxx effort, xxxx xx is xxxxxx off putting xx high effort xxxxx his xxxxxx xx higher xx this case xxxxx M1 is xxxxxx off xxxxxxxx xxxxxx level xxxxx is opposite xx what M2 xxxxxxx M1 xxxx xxx have x strictly dominant xxxxxxxx Since the xxxxxxx and xxxxxxx xxx.....
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