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Examples for Chapter 6 1. Suppose there are significant specialized investments required for exchange, and furthermore, significant gains to specialization. It is relatively easy to specify likely future events. What method of procuring inputs would you use, and why? 2. Suppose the marginal benefit of writing a contract is $50, independent of length. Find the optimal contract length when the marginal cost of writing a contract length is: a. MC(L) = 10 + 2L b. MC(L) = 5 + 2L c. What happens to the optimal contract length when the marginal cost of a contract declines? 3. Explain why, as an individual shareholder, the structure of managements compensation is perhaps more important to your well-being than the dollar amount of that compensation. 4. a. Why do you think authors are paid royalties for writing books? b. Are there any disadvantages associated with this type of compensation scheme? 5. A manager is paid $100 per day as a base salary, plus he receives 5 percent of the firms profits. For every hour he spends managing during an 8-hour day, the firm earns $1000 in profits. Graph the managers opportunity set, and show the situation where he works 7 hours per day, in equilibrium. Also indicate his daily earnings in your graph.... View Full Document

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