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economics Assignment




Question;A rm has two divisions, each of which has its own manager. Managers of thesedivisions are paid according to their eort in promoting productivity in their divisions,which is judged by comparison with other managers and other divisions. If bothmanagers are judged as having expended high eort," each earns $150,000/year. Ifboth are judged to have expended low eort," each earns $100,000/year. But ifone of the two managers shows high eort" while the other shows low eort," thehigh eort" manager is paid $150,000 plus a $50,000 bonus, while the second (loweort") manager gets a reduced salary of $80,000. Managers make their eort decisionsindependently and without knowledge of the other manager's choices.(a) Assume that expending eort is costless to the managers and draw the payotable for this game. Find the nash equilibrium of the game and explain whetherthe game is a prisoners' dilemma.(b) Now suppose that expending high eort is costly to the mangers (such as a costlysignal 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 forthis new version of the game and nd the Nash equilibrium. Explain whether thegame 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 changefrom that described in part b? What is the new equilibrium? Explain whetherthe game is a prisoners' dilemma and how it has changed from the games in parta and b.(d) Assume now that the owner of the rm can't actually observe manager eort, butinstead determines eort based on relative output of the two divisions, meaningthat the manager with the division that produces the most is assumed to haveprovided the highest eort. If the payos are the same in part c, does this changethe outcome of the game? If the managers play this game repeatedly, does itmatter whether eort is directly observable?Additional RequirementsMin Pages: 1Max Pages: 2Level of Detail: Show all workOther 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)


Paper#58121 | Written in 18-Jul-2015

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