Asymmetric_info - UBC COMM/FRE 295 Practice Problems...

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1 UBC COMM/FRE 295 Practice Problems Asymmetric Information 1. A firm’s short-run revenue is given by R = 10e - e 2 , where e is the level of effort by a typical worker (all workers are assumed to be identical). A worker chooses his level of effort to maximize his wage net of effort w - e (the per-unit cost of effort is assumed to be 1). Determine the level of effort and the level of profit (revenue less wage paid) for each of the following wage arrangements. Explain why these differing principal-agent relationships generate different outcomes. a) w = 2 for e 1; otherwise w = 0. and (b) w = R - 12.5. 2. A certain firm can hire two types of workers: Group A workers who have high productivity and Group B workers with low productivity. Group A workers will add $27,500 to the firm's revenues per year, while Group B workers will increase the firm's revenues by $15,000 per year. The firm's managers expect workers to be employed for eight years. The differences in the workers' productivity levels are reflected in their
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