425-hw2-franchising - ECON 425 Fall 2006 Homework #2 The...

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ECON 425 Fall 2006 Homework #2 The following is a simpli&ed version of the franchise problem found in Mathew- son ± Winter (1985): A Franchisor (P) contracts with a franchisee (A) in a local market where sales are a function of A²s investment in quality ( q ). However the sales function is stochastic; there are good days and bad days. The sales function for each state can be described as follows: good : X 2 ( q 2 ) = 14 q 2 q 2 2 bad : X 1 ( q 1 ) = 10 q 1 q 2 1 On any given day only A knows which state (good or bad). P knows the production function and can measure output, thereby inferring the state. The F i of q i . The cost of q i is c ( q i ) = 2 q i and is completely paid for by the franchisee. X; q; and F in f = 0 : 4 and that the following condition must hold regarding the agent²s pro&t function. 0 : 4
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This note was uploaded on 09/13/2009 for the course ECONOMCIS Econ 425 taught by Professor Kelvin during the Spring '09 term at Simon Fraser.

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