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Moral Hazard. There is a risk neutral principal and a risk averse agent. The agent exerts effort a that results in output x = a + , where ∼ N(0; 1). The principal observes x but not a. The agent’s utility is u(w; a) = − 1/2e^2(w−c(a)) if he works for the principal and U= − 1/2e^2 if he does not; his costs of exerting effort a > 0 are c(a) = (a^2)/2 + 1/2 .
(a) Find the first best level of effort. Calculate the profit of the principal.
(b) Solve for the second-best linear contract w(x, a) = αx + β. Calculate the Principal’s profit. Compare your results to the FB and provide the intuition.
Consider the market for taxi service in a city. Explain, by using supply and demand curves, how each of the following actions will affect the market. (Consider each case separately) A. Bus drivers go on strike. B. Bus fares increase after a strike by..
Illustrate what is the value of the equilibrium exchange rate. Assume the demand for dollars increases by 300 billion at each exchange rate.
Compute the equilibrium level of income. Sketch this equilibrium position using a two-dimensional graph.
Promoters of a major college basketball tournament estimate that the demand for tickets on the part of adults is given by Qad = 5,000 ? 10P, and that the demand for tickets on the part of students is given by Qst= 10,000 ? 100P. The promoters wish to..
Why would a US company choose to export a product to India rather than license India the right to produce the product locally
Illustrate what were the major factors that have affected US household consumption While the recession in 2001
The Federal Reserve’s target rate for the federal funds rate
The definition of a price maker is a firm with some power to set the price because the demand curve for its output slopes downward which in effect means those firms with a downward sloping demand curve have some market power.
Discuss why black Monday, the day when the djia declined more than 20% is not evidence against the efficient market hypothesis. What issues do critics cite when discussing why sarbanes-oxley has let to a decline in USA capital markets?
Because changes in interest rates produce substitution and income effects that ________, we can't be sure what happens to _______ if interest rates change.
All the costs of exhibiting movies are fixed except for the $3.50 royalty payment you must make to the film distributor for each ticket sold. What price should you charge for movie tickets?
Throughout the company’s franchises, the probability is 0.60 that a meal lwill be served with in 45 seconds. What is the expected number of coupons a counter employee will receive when serving the regional manager?
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