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PS2 Questions and Answers (not to be turned in)

PS2 Questions and Answers (not to be turned in) - ECON 106...

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ECON 106 – Economics of Entrepreneurship Prof. Ackerberg Problem Set #2 (not to be handed in) Note: these questions cover the second half of the course. Note that the final will also cover the first half of the course (approx. 1/3 on the first half). 1) True, False, or Uncertain - be sure to provide a brief but clear explanation of your rationale. a) A corporation typically has a tax advantage over a sole proprietorship. b) Even if you are not seeking outside funding for your business, it is a good idea to write up a business plan. c) You should always negotiate things yourself, i.e. not allow others to negotiate for you. d) You should patent any new invention. 2) Short answer a) Describe the network externality in the online auction market. Is this an indirect or direct network externality? b) What do you think is the most important factor influencing the choice between debt or equity financing for a new business? c) Describe why “monitoring” is a crucial element of successful tacit collusion. 3) Doug and Jeff are negotiating over a bowl of ice cream. There are four rounds to the game: Round 1: Doug offers a split, Jeff accepts or declines Round 2: Jeff offers a split, Doug accepts or declines Round 3: Doug offers a split, Jeff accepts or declines Round 4: Jeff offers a split, Doug accepts or declines End of game. Each round, the ice cream melts by a quarter, i.e. if they agree in round 1, the entire bowl is left; if they agree in round 2, ¾ is left; if they agree in round 3, ½ is left; and if they agree in round 4 ¼ is left.
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