Quiz 18: Asymmetric Information

Business

a) If the contingency fee is 1/3 rd , the surplus to the lawyer is given by img img The first order condition for the above function is img Hence, the surplus maximizing effort for the lawyer is img The lawyer's surplus then is img The plaintiff's surplus then is img b) If the contingency fee is c , the surplus to the lawyer is given by img img The first order condition for the above function is img Hence, the surplus maximizing effort for the lawyer is img The lawyer's surplus then is img The plaintiff's surplus then is img c) The plaintiff's surplus is img The first order condition for the above function is img Hence, the surplus maximizing contingency fee for the plaintiff is img The plaintiff's surplus then is img If contingency fees is img , surplus maximizing effort for the lawyer is img The lawyer's surplus then is img d) If the plaintiff can sell the case to her lawyer she can extract the whole surplus of the lawyer and increase her surplus. This can be done by setting a 100% contingency fee. The lawyer will then choose l = 1 and earn a surplus ½. The plaintiff can then sell the case for ½ and extract his surplus. As this scheme does not leave the lawyer with any surplus it is outlawed in many countries.

If instead of two tariffs, the coffee shop charges price p per ounce of coffee, then the the utility function of a consumer is given by img The first order condition for the above yields img So, the inverse demand function of consumer is given by img As img , we get img Putting this in the inverse demand function, we get img So, img The expected profit of the coffee shop is given by img Substituting the demand function for the two types of demanders, we get img img The first order condition for this is img Re arranging the above we get, img Solving for p, we get, img The expected profit of the shop is given by img If instead the firm sets non-linear price, the expected profit is found to be 50. Hence, non-linear price is a better strategy.

a) We know that to maximize the monopolists' expected profit img As img , we get img Substituting the values, we get img img img img img The tariff for the low type is given by img The optimal quantity and tariff for high demander remains unchanged at 16 and 160 respectively. Only the quantity and tariff of the low type is affected, that of the high type remains unaffected. This shows that there is "no distortion at the top".

There is no answer for this question

There is no answer for this question