1. According to the rule of optimal input usage, a firm should hire a person as long as her marginal revenue product is greater than her marginal cost to the company. We know that many companies have management training programs in which new trainees are paid relatively high starting salaries and are not expected to make substantial contribution to the company until the program is over (it may take 6 to 18 months). In offering such training programs, is a company violating the optimality rule? Explain.
2. Suppose Sri Lankan government awarded contracts to private companies to rebuild the country after Tsunami on the basis of 120% of cost incurred by the firms. Would this constitute a moral hazard? If so, what should the government do to prevent such a problem?
3. Demand is given by: QD = 6000 - 50P, Domestic supply is: QS = 25P, and Foreign producers can supply any quantity at a price of $40.
a. If foreign producers can sell in the domestic market, what is the equilibrium price? What is the equilibrium quantity? How much is sold by domestic and foreign producers, respectively?
b. Under domestic government pressure, foreign producers voluntarily agree to restrict their goods. What will happen to the price and quantity? What will happen to the amount that domestic producers supply? What will happen to revenues of domestic and foreign producers?
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