ps_12 - Problem Set #12 Ec 201 Michigan State University...

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Problem Set #12 Ec 201 Spring, 2009 Michigan State University L. Martin 1. Al’s Tax Preparation Business (motto: Low taxes for less) offers middle class families help with their taxes. The typical family values a high quality tax service at $500, and it places a value on a low cost service equal to $0. Al’s cost for a high quality job is $200, and the cost of a low quality job is $100. The discount factor is 0.8. a. Is there a potential market for high quality tax preparation? Is there one for low quality tax preparation? b. Write down the payoffs in a box (the normal form), showing the players and their strategies. c. What is the best response of the customer to Al’s choice of high quality? d. What is the best response of Al to the customer’s choice of “Buy”? e. What is the best response of the customer to Al’s choice of low quality? f. Explain the equilibrium. g. What is the minimum price that will eliminate the market failure when the customers use a trigger strategy?
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2. (principal-agent problem)
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This note was uploaded on 10/17/2011 for the course EC 201 taught by Professor Haider during the Spring '10 term at Michigan State University.

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ps_12 - Problem Set #12 Ec 201 Michigan State University...

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