Answer to Question #96732 in Economics of Enterprise for kk

Question

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

Answer 1

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.

So, the correct answer is a.