Anna Chang is a sales agent for XYZ Company. She has an effort cost function of C = e2 and a reservation wage of $1,500. Her wage package is W = 1,500 + 0.2Q where the CEO sets the incentive at 0.2 and Q = 200e. Q is the output. If the CEO increases the incentive from 0.2 to 0.25, what happens to the Anna's effort? Will profits rise or fall? (20 points)
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#2
Great Cars, Inc. faces the following demand function for its automobiles:
P = 55,000 - 200 Q
Its marginal cost (MC) is $9,000. What will its price be if it decides to sell the automobiles by itself and what will the price be if it sells though DistriCorp, Inc. an independent distributor. Note that when Great Cars, Inc. contracts with DistriCorp, it has to take into account that DistriCoro faces the same demand curve. What is the consequence of this exclusive dealing on prices? (20 points)
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#3
Some years ago, conservation groups paid cattlemen in the Western United States to move their herds away from wild buffalo herds so that the buffalo would have more feed and would not have to compete with the cattle. What is the relevance of the Coase Theorem in this case? (10 points)
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