Solutions ps 5 part 2 - Economics of Organizations...

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Economics of Organizations 2010-2011 Prof.: Pablo Ruiz Verdú Problem Set 5 - Solutions Part 2 1. Ana is the head of the Spanish division of EKirja, a Finnish company that produces and sells electronic readers ("e-readers"). EKirja has an assembly plant of e-readers in Spain and Ana’s work as head of EKirja-Spain is twofold: on the one hand, she manages the production of e- readers in Ekirja’s Spanish manufacturing plant (task 1); on the other hand, Ana is responsible for the sales in Spain of the e-readers assembled in the Spanish plant (task 2). The cost for Anna of exerting effort a 1 in task 1 and effort a 2 in task 2 is: a. Compute the value of this cost function at (a 1 ,a 2 )=(0,0), (a 1 ,a 2 )= (1,1) and (a 1 ,a 2 )= (3,3) . Interpret your results. C (0,0)=(-2) 2 /2+ (-1) 2 /2 =2.5 C (1,1)=(1+1-2) 2 /2+ (1-1) 2 /2 =0 C (3,3)=(3+3-2) 2 /2+ (3-1) 2 /2 =10 Therefore, putting no effort whatsoever is more costly for Ana than putting one unit of effort on each task. We can interpret this as follows: given that we are at a certain job we may actually prefer doing something useful than doing nothing. However, when the levels of effort increase beyond a certain threshold (for example, when (a 1 ,a 2 )= (3,3)) it becomes costlier for Ana to increase effort further. b.
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This note was uploaded on 02/03/2011 for the course ECON 302 taught by Professor Pablo during the Spring '11 term at Universidad Carlos III de Madrid.

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Solutions ps 5 part 2 - Economics of Organizations...

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