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Problem 3. Moral Hazard (46 points, due to Botond Koszegi). We analyze here a principal-agent problem with hidden action (moral hazard). The principal is hiring an agent. The agent can put high effort eH or low effort eL. If the agent puts high effort eH, the output is yH = 18 with probability 3/4 and yL = 1 with probability 1/4. If the agent puts low effort eL, the output is yH = 18 with probability 1/4 and yL = 1 wen action). We want to determine the optimal contract. In this case, the principal pays a wage w (e) that can depend on the effort. The way you solve a problem like this with a discrete number of effort levels is to study first the case in which the principal wants to implement high effort eH. In this case, the wage will be w if the agent chooses eH and 0 otherwise. Solve the problem max w 3 4 18 + 1 4 1 w s.t.w c (eH) .1 Argue that the constraint is satisfied with equality and solve for w. Compute the expected profit in this case EH. (5 points) 2. We are still in the case of no hidden action. Assume that the principal wants to implement low effort eL. Similarly to above, set up the maximization problem and solve for w. Compute the expected profit in this case EL and compare with EH. Which profit level is higher? The higher one is the contract chosen by the principal and hence the action implemented. (5 points) 3. Now consider the case with hidden action. The wages can only be a function of the outcomes: wH when y = yH and wL when y = yL. We study this case in two steps. Assume first that the principle wants to implement eH. We study the optimal behavior of the agent after signing the contract. Write the inequality that indicates under what condition the agent prefers action eH to action eL. (This is a function of wH and wL and goes under the name of incentive compatibility constraint). (5 points) 4. Now consider the condition under which the agent prefers the contract offered to the reservation utility .1. (This is the individual rationality constraint) (4 points) 5. Argue that the two inequalities you just derived will be satisfied with equality. Solve the two equations to derive w L and w H. Compute the profits for the principal from implementing the high action under hidden action: EHA H . (5 points) 6. Now, assume that the principal wants the agent to take the low action eL. In this case, you do not need to worry that the agent will deviate to the high action, since that will take more effort. The principal will pay a flat wage w. Write the individual rationality constraint for the agent if he takes the action eL and the pay is w. Set this constraint to equality (Why?) and derive w. Compute the implied profits for the principal from implementing the low action under hidden action: EHA L .(5 points) 7. Compare the profits in point 6 (profits from low effort) and in point 7 (profits from low effort). Under hidden action, what contract does the principal choose to implement, the one that guarantees high effort or the one that guarantees low effort? (4 points) 8. Compare the profits for the principal under perfect observability and under hidden action. Why are they different despite the fact that the action chosen by the agent in equilibrium will be the same? (6 points) 9. There is a monitoring system that allows the principal to perfectly observe the actions (and hence to implement the perfect observability contract). How much would the principal be willing to pay for it? (3 points) 10. Compare the utility of the agent under perfect observability and under hidden action. (4 points)

The 'Law of Comparative Advantage' suggests that specialisation and trade increases world output. (i) Explain the meaning of the underlined term in the context of international trade. (ii) Identify the main assumptions underlying this law. (iii) Identify two sources of comparative advantage for the Irish economy. (30 marks) (b) Ireland is a small open economy which relies very heavily on international trade.

Theme; The strategy of International Business Maldives is a country which depends heavily on the tourism industry, and recently due to the COVID pandemic the need refocus, and create more industries like tourism industry has created some policy debates. Some of the products that are expensively priced include fish and fish related products, Thundu Kuna, Sarongs, Lacquer work, handmade dhoni, Jewelry and coconut products. Explore MIFCO, and identify international business strategy to expand the MIFCO (Maldives Industrial Fisheries Company Ltd, https:a) PESTEL analysis of both the countries separately (20marks) b) In depth screening of both the countries separately i. Country and Concentration ii. Culture and beliefs (using HOFSTEDE's model) ii Market entry strategy given with a detailed justification of the chosen strategy and showing the relevance of it for the particular country. (25marks) c) i. Discuss elaboratively how you would market the product, and distribute the product in the given market. (20 marks) ii. Marketing mix for the product stated with chosen distribution channel, and ROI figure given. Marketing mix modified to suit the given country. ROI calculation showed, and justify why specific distribution channel was used. ( 18 marks) [2:29 PM, 10/25/2021] Flo: Question: Problems 11 to 23 and Case Problem 2 require the use of data mining software. If using R/Rattle to solve these problems, refer to Appendix: R/Rattle Settings to Solve Chapter 5 Problems. If using JMP Pro to solve these problems, refer to Appendix: JMP Pro Settings to Solve Chapter 5 Problems.k

(2 marks) Explain the effects of trade on the industry of tomato cans. Question: 1. A corporate treasurer is designing a hedging program involving foreign currency options. What are the pros and cons of using (a) NASDAQ OMX and (b) the over-the-counter market for trading?

2. Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option.

3. Suppose that a European put option to sell a share for $60 costs $8 and is held until maturity. Under what circumstances will the seller of the option (the party with the short position) make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a short position in the option depends on the stock price at maturity of the option.

4. Describe the terminal value of the following portfolio: a newly entered-into long forward contract on an asset and a long position in a European put option on the asset with the same maturity as the forward contract and a strike price that is equal to the forward price of the asset at the time the portfolio is set up. Show that the European put option has the same value as a European call option with the same strike price and maturity.

5. A trader buys a call option with a strike price of $45 and a put option with a strike price of $40. Both options have the same maturity. The call costs $3 and the put costs $4. Draw a diagram showing the variation of the trader's profit with the asset price.

6. Explain why an American option is always worth at least as much as a European option on the same asset with the same strike price and exercise date.

7. Explain why an American option is always worth at least as much as its intrinsic value.

8. Explain carefully the difference between writing a put option and buying a call option.

9. The treasurer of a corporation is trying to choose between options and forward contracts to hedge the corporation's foreign exchange risk. Discuss the advantages and disadvantages of each.

10. Consider an exchange-traded call option contract to buy 500 shares with a strike price of $40 and maturity in 4 months. Explain how the terms of the option contract change when there is: (a) a 10% stock dividend; (b) a 10% cash dividend; and (c) a 4-for-1 stock split.

(8 marks) Now imagine a scenario where firms in the industry of canned tomato at Home also differ in terms of their productivity, that is, marginal costs are different across firms. Consider the following graph representing two of the firms participating in this market at Home in auta

Note that both firms face the same demand curve (D). The slope of D is given by:

Where is the size of the market and is a parameter that indicates the sensitivity of a firm's demand to changes in the firm's price.

The research involved conducting a survey of taxi drivers. Staff members at Pointsec's public relations firm called major taxi companies in nine cities in Australia, Denmark, Finland, France, Germany, Norway, Sweden, Great Britain, and the United States. Each of the cooperating companies put these interviewers in touch with about one hundred drivers. Drivers were asked how many devices of each typecell phones, PDAs, computers, and so onhad been left in their cab over the preceding six months. From these numbers, they came up with the rate of items left behind. Multiplying by the size

of taxi fleets in each city, the researchers came up with city-by-city numbers: 3.42 cell phones per cab yielded 85,619 cell phones left behind in Chicago, for example. In London, the researchers concluded 63,135 cell phones were left in cabs, a startling increase of 71 percent compared to four years earlier.