Answers to Selected Problems

customer. Thus, the full-information competitive
price is charged in this market.
Chapter 19
1.2 By making this commitment, a company may be
trying to assure customers who cannot judge how
quickly a product will deteriorate that the product is
durable enough to maintain at least a certain value in
the future. The firm is trying to eliminate asymmetric
information to increase the demand for its product.
1.3 Presumably, the promoter collects a percentage of
the revenue of each restaurant. If customers can
pay cash, the restaurants may not report the total
amount of food they sell. The scrip makes such
opportunistic behavior difficult.
2.1 This agreement led to very long conversations.
Whichever of them was enjoying the call more
apparently figured that he or she would get the full
marginal benefit of one more minute of talking while
having to pay only half the marginal cost. From this
experience, I learned not to open our phone bill
so as to avoid being shocked by the amount due
(back in an era when long-distance phone calls were
expensive).
2.2 A partner who works an extra hour bears the full
opportunity cost of this extra hour but gets only
half the marginal benefit from the extra business
profit. The opportunity cost of extra time spent at
Answers to Selected Problems
E-51
the store is the partner’s best alternative use of time.
A partner could earn money working for someone
else or use the time to have fun. Because a partner
bears the full marginal cost but gets only half the
marginal benefit (the extra business profit) from
an extra hour of work, each partner works only up
to the point at which the marginal cost equals half
the marginal benefit. Thus, each has an incentive to
put in less effort than the level that maximizes their
joint profit, where the marginal cost equals the marginal
benefit.
2.4 If Paula pays Arthur a fixed-fee salary of $168,
Arthur has no incentive to buy any carvings for
resale, given that the $12 per carving cost comes out
of his pocket. Thus, Arthur sells no carvings if he
receives a fixed salary and can sell as many or as few
carvings as he wants. The contract is not incentive
compatible. For Arthur to behave efficiently, this
fixed-fee contract must be modified. For example,
the contract could specify that Arthur gets a salary
of $168 and that he must obtain and sell 12 carvings.
Paula must monitor his behavior. (Paula’s residual
profit is the joint profit minus $168, so she gets the
marginal profit from each additional sale and wants
to sell the joint-profit-maximizing number of carvings.)
Arthur makes $24 = $168 - $144, so he is
willing to participate. Joint profit is maximized at
$72, and Paula gets the maximum possible residual
profit of $48.
4.2 The minimum bond that deters stealing is $2,500.