Daily Archives: September 2, 2021

Consider a managerial effort example similar to the one in Section 5. The value of a successful project is $420,000; the probabilities of success are 12 with good supervision and 14 without. The manager is risk neutral, not risk averse as in the text, so his expected utility equals his expected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervision on your project is $100,000.

(a) Show that inducing high effort would require the firm to offer a compensation scheme with a negative base salary; that is, if the project fails, the manager pays the firm an amount stipulated in the scheme.

(b) How might a negative base salary be implemented in reality?

….

Cheapskates is a very minor-league professional hockey team

Cheapskates is a very minor-league professional hockey team. Its facilities are large enough to accommodate all of the 1,000 fans who might want to watch its home games. It can provide two types of seats—ordinary and luxury. There are also two sorts of fans: 60% of the fans are blue-collar fans, and the rest are white-collar fans. The costs of providing each type of seat and the fans’ willingness to pay for each type of seat are given in the following table (measured in dollars):

Each fan will buy at most one seat, depending on the consumer surplus he would get (maximum willingness to pay minus the actual price paid) from the two kinds. If the surplus for both is negative, then he won’t buy any. If….

Discuss the reasons that a firm might wish to employ the tournament scheme described above. Consider the effects on the incentives of both the firm and the workers

In many situations, agents exert effort in order to get promoted to a better-paid position, where the reward for that position is fixed and where agents compete among themselves for those positions. Tournament theory considers a group of agents competing for a fixed set of prizes. In this case, all that matters for winning is one’s positions relative to others, rather than one’s absolute level of performance.

(a) Discuss the reasons that a firm might wish to employ the tournament scheme described above. Consider the effects on the incentives of both the firm and the workers.

(b) Discuss the reasons that a firm might not wish to employ the tournament scheme described above. (c) State one specific prediction of tournament theory and provide an example of empirical evidence….

Consider a game between a union and the company that employs the union membership.

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Consider a game between a union and the company that employs the union membership. The union can threaten to strike (or not) to get the company to meet its wage and benefits demands. When faced with a threatened strike, the company can choose to concede to the demands of the union or to defy its threat of a strike. The union, however, does not know the company’s profit position when it decides whether to make its threat; it does not know whether the company is sufficiently profitable to meet its demands—and the company’s assertions in this matter cannot be believed. Nature determines whether the company is profitable; the probability that the firm is unprofitable is p. The payoff structure is as follows:

(i) When the union makes no….

Scenes from many movies illustrate the concept of brinkmanship.

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Scenes from many movies illustrate the concept of brinkmanship. Analyze the following descriptions from this perspective. What are the risks the two sides face? How do those risks increase during the course of the execution of the brinkmanship threat?

(a) In the 1980 film The Gods Must Be Crazy, the only survivor of a rebel team that tried to assassinate the president of an African country has been captured and is being interrogated. He stands blindfolded with his back to the open door of a helicopter. Above the noise of the helicopter rotors, an officer asks him, “Who is your leader? Where is your hideout?” The man does not answer, and the officer pushes him out of the door. In the next scene, we see that although its….

In this exercise, we provide a couple examples of the successful use of brinkmanship, where “success” is indicative of the two sides’ reaching a mutually acceptable deal.

In this exercise, we provide a couple examples of the successful use of brinkmanship, where “success” is indicative of the two sides’ reaching a mutually acceptable deal. For each example,

(i) identify the interests of the parties;

(ii) describe the nature of the uncertainty inherent in the situation;

(iii) give the strategies the parties used to escalate the risk of disaster;

(iv) discuss whether the strategies were good ones; and

(v) (Optional) if you can, set up a small mathematical model of the kind presented in this chapter. In each case, we provide a few readings to get you started; you should locate more by using the resources of your library and resources on the World Wide Web such as Lexis-Nexis.

(a) The Uruguay Round of international trade….

Incorporate this change in payoff into a game tree similar to the one in Figure 14.4.

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In the chapter, we argue that the payoff to the United States is 210 when (either type) Soviets defy the U.S. threat; these payoffs are illustrated in Figure 14.3. Suppose now that this payoff is in fact 212 rather than 210.

(a) Incorporate this change in payoff into a game tree similar to the one in Figure 14.4.

(b) Using the payoffs from your game tree in part (a), find the effectiveness condition for this version of the U.S.–USSR brinkmanship game.

(d) Draw a diagram similar to that in Figure 14.5, illustrating the effectiveness and acceptability conditions found in parts (b) and (c).

(e) For what values of p, the probability that the Soviets….

Answer the questions from Exercise S2 for the following movies

Answer the questions from Exercise S2 for the following movies:

(a) In the 1941 movie classic The Maltese Falcon, the hero, Sam Spade (Humphrey Bogart), is the only person who knows the location of the immensely valuable gem-studded falcon figure, and the villain, Caspar Gutman (Sydney Greenstreet), is threatening to torture him for that information. Spade points out that torture is useless unless the threat of death lies behind it, and Gutman cannot afford to kill Spade, because then the information dies with him. Therefore, he may as well not bother with the threat of torture. Gutman replies, “That is an attitude, sir, that calls for the most delicate judgment on both sides, because, as you know, sir, men are likely to forget in the heat of action….

Consider a vote being taken by three roommates, A, B, and C, who share a triple dorm room.