Hierachies, incentives and firm structure ECOS3003
Tutorial 1
1. Question 3-14 in Brickley et al (2009), p. 101.
2. What do you think will happen to the price and quantity of DVD players if:
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(a) The availability of good movies to play on DVD players increases?
(b) Personal income increases?
(c) The price of inputs used to produce DVD players decreases?
(d) Ticket prices at local movie theatres decline substantially?
3. At the time, many film makers argued that the advent of video would harm the film making industry. Assess this argument. Do you think your arguments apply to DVDs? What about more recent technological developments (relating to the delivery of content) in this industry?
4. (a) (b) (c)
What are contracting costs?
Give a few examples of contracting costs.
What effect does the existence of contracting costs have on market economies?
almond orchard. It costs the beekeeper $25 to maintain each beehive. If the beekeeper places her hives near the almond orchard almond production increases by $10 per hive. The benefit to the beekeeper from placing her hives near the almond orchard is $50 for the first hive, $40 for the second hive, $30 for the third hive, $20 for the fourth hive, $10 for the fifth hive and $0 for any subsequent hives. If the almond orchard buys the beekeeping operation (that is, the two activities are performed by the same firm) what is the number of hives that will be placed near the almond orchard?
Explain your answer in context of the literature on market mechanisms to deal with externalities.
6. What is a firm?
7. Give examples of incentive conflicts between:
(a) shareholders and managers
(b) co-workers on teams
8. What is asymmetric information? How can it limit contracts from solving incentive conflicts? ECOS3003 Tutorial 1 1
Consider an externality between a beekeeper (and her bees) and almond production from an
9. Explain how US insider-trading laws can be thought of as a prisoners¡¯ dilemma. Can you think of any other examples in which the designer of the game (the government, regulator etc) tries to set up a prisoners¡¯ dilemma for the participants.
10. Consider the following entry game. Virgin Blue can enter the market (E) or decide to not enter (NE). If they choose NE Qantas gets a profit of 20 and Virgin gets a profit of 5. If Virgin chooses to E, Qantas can then choose to either punish (P) or accommodate (A). If Qantas choose P the payoffs are 7 for Qantas and -5 for Virgin. If Qantas opts to A the payoffs are 8 to each party.
(a) Draw the game tree of this game
(b) How do you get the subgame perfect equilibrium in a game? What is it here?
(c) Change the payoff to Qantas when Virgin enters and Qantas accommodates to 5. All other payoffs
remain the same. What is the subgame perfect equilibrium now?
11. Give an example of a coordination game.
ECOS3003 Tutorial 1 2
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