problemset2 - EC332 Fall 2009 Prof Jordi Jaumandreu Problem...

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EC332, Fall 2009, Prof. Jordi Jaumandreu Problem set #2 1. (Cabral) Suppose that a …rm’s pro…ts are given by = fi + ` ( e ) + " , where fi denotes the the intensity of product market competition (the higher competition the lower fi ), e e¤ort by the manager, and " is a random shock. The function ` ( e ) is increasing and concave, that is, ` 0 > 0 and ` 00 < 0 . In order the …rm to survive, it must be that pro…ts are greater than : The manager’s payo¤ is fl > 0 if the …rm survives and zero if it is liquidated, that is, if pro…ts fall short of the minimum target. Suppose that " » N ( „; ° 2 ) and „ > … : Show that increased product compe- tition induces greater e¤ort by the manager. 2. (Cabral) After spending 10 years and $1.5 billion, you have …nally gotten Food and Drug Administration (FDA) approval to sell your new patented won- der drug, which reduces the aches and pains associated with aging joints. You will market this drug under the brand name of Ageless. Market research indi- cates that the elasticity of demand for Ageless is 1.25 (at all points of demand
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