Problem 10.4 – Five Forces and the Airline Industry
Examine the U.S. passenger airline industry using the Five Forces model. Is this an attractive industry? Why or why not?
Problem 15.5 – Renegotiating Employment Contracts
Every year, management and labor renegotiate a new employment contract by sending their proposals to an arbitrator who chooses the best proposal (effectively giving one side or the other $1 million). Each side can choose to hire, or not hire, an expensive labor lawyer (at a cost of $200,000) who is effective at preparing the proposal in the best light. If neither hires lawyers or if both hire lawyers, each side can expect to win about half the time. If only one side hires a lawyer, it can expect to win three-quarters of the time. (Diagram Attached)
- Diagram this simultaneous-move game.
- What is the Nash equilibrium of the game?
- Would the sides want to ban lawyers?
Problem 19.4 – Job Auction
When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction. The bids for the jobs consisted of promises of future profit streams that the managers would generate and then deliver to the state. In cases where the incumbent manager was the winning bidder, firm productivity tended to increase dramatically. When outside bidders won, there was little productivity improvement. If incumbent managers were not generally more qualified, how can you explain this result?
Problem 20.2 – Business Loan
A colleague tells you that he can get a business loan from the bank, but the rates seem very high for what your colleague considers a low-risk loan.
- Give an adverse selection explanation for this, and offer advice to your friend on how to solve the problem.
- Give a moral hazard explanation for this, and offer advice to your friend on how to solve the problem.
Please use a Microsoft Word Document
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