1. Rob supplies an input to Pete, the value of which depends on Rob’s effort e. Exerting effort costs Rob 1⁄2.e^2, however it generates revenue/return of 20e. What is the surplus-maximising level of effort e?
a. 5
b. 10
c. 20
d. 2
e. None of the above
2. Rob supplies an input to Pete, the value of which depends on Rob’s effort e. Exerting effort costs Rob 1⁄2.e^2, however it generates revenue/return of 20e. After Rob has invested his effort (which is sunk), but before the revenue Pete enters negotiates about how to share this return. Pete is a skillful negotiator, so will capture 3⁄4 of the return. What level of e does Rob invest?
a. 5
b. 10
c. 20
d. 2
e. None of the above
1
Expert's answer
2019-10-22T09:37:07-0400
1. The surplus-maximising level of effort e is at MR = MC, so:
TR' = TC',
e = 20.
So, the correct answer is C.
2. If Pete is a skillful negotiator, so will capture 3⁄4 of the return, then Pete will receive only 5.
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