Study Guides (248,518)
Canada (121,606)
Economics (239)
ECO370Y5 (12)
Midterm

# Test 1 2010 fall

7 Pages
360 Views

Department
Economics
Course
ECO370Y5
Professor
Robert Barber
Semester
Fall

Description
ECO 370 Economics of Organization Test I Solution Outline Friday, November 26, 2010 10:10 AM to 12:00 PM NB 263 ______________________________________________________________________ Question 1,3,5 Suppose there are two firms, A and B. These firms decide to make a joint (12) investment in a project. The total revenue from the project is 2A0(V +BV ) which A and B agree to share equally. VAis the value and the cost of the investment Firm A makes. V iB the value and the cost of the investment Firm B makes. 5 (a) State and explain the principle of value maximization 47,3L3011L.L039,OO4.,9L4n, there exists another (total value 2,[L2L]L3J ,OO4.,9L439K,9,OO419K05,79L08897L.9O570107 [Milgrom and Roberts pp. 35 - 36] The objective of both the principal and the agent in establishing a contract is to maximize the welfare or social surplus of the organization Only when the value maximization principle applies is there an objective that one can ascribe to an organization implied by efficiency. 5 (b) Show that the value maximizing total investment of firms A and B is \$10,000 when each firm can observe the investment of the other firm. Total Surplus = 200(V +AV ) B (1 V A V B (-12) dSdV =A100(V + A ) B 1 = 0 dSdV =B100(V + A ) B(-1 1 = 0 10,000 = (V + V ) A B 5,000 = V A V B Total Surplus* = 200(10,000) (1 10,000 = 10,000 5 (c) Suppose each firm cannot observe the investment of the other firm. Show that if Firm A expects Firm B to invest B (which Firm A cannot observe) then the optimal amount Firm A will invest is VA= \$2,500 - V B Since A cannot see what B invests, Firm A will take V Bs given and maximize its profit Profit = 5A = 100(V A V )B (12 VA www.notesolution.com
More Less

Related notes for ECO370Y5
Me

Log In

OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.

Request Course
Submit