Solve the following
a) Find all strategy profiles where players can cooperate and increase their payoffs if the stage game is played infinitely many times. You are expected to just write the strategy profiles, no need to show any calculations.
b) Define a grim-trigger strategy profile for the case in which both players choose A in every period and the strategy profile is an SPNE.
c) Check the optimality of the punishment that you used in part (2a)
d) Find a strategy profile that results in an outcome path in which both players choose A in every period and the strategy profile is an SPNE (i.e. conditions under which (A, A) cooperation strategy can be sustained).
e) Define a grim-trigger strategy profile for the case in which players cooperate and choose (A, D) in every period and the strategy profile is an SPNE.
f) Find a strategy profile that results in an outcome path in which players cooperate and choose (A, D) in every period and the strategy profile is an SPNE (i.e. conditions under which (A, D) cooperation strategy can be sustained).
Question 14 a) Allen would like to open a business to produce a software that he thinks would be well-received by the market. However. the investment needed to start a busi- ness is very high and Allen could barely cover it on his own. The software is very likely to be successful and generate prots. but it takes 2 years before prots are generated. Explain why the existence of a nancial intermediary. like a bank, makes Allen's investment more likely. [4 marks] b) Banks are nancial intermediaries engaged in maturity transformation. Explain 0) d) what it means for banks to engage in maturity transformation and what are the risks associated with it for banks and depositors. How do banks make prots? [8 marks] Now assume that Allen needs to borrow 300 to produce his software, which will generate 500 in two years. There are N savers in the economy, each en- dowed with 2 and each facing a 25% chance that there will be an emergency and they will need their 2 back. What is the minimum value of N such that a nancial intermediary can solve the problem of getting money from savers to borrowers? [6 marks] After the 2009 nancial crisis. countries in the Basel Committee on Banking Supervision have agreed to raise the mandatory reserves for banks. Explain what happens to the money muitiplier and the bank deposit multiplier if the re- serve ratio is increased and what governments need to do if they wish to main- tain the previous level of broad money M. [8 marks] What's the difference between a liquidity crisis and a solvency crisis? When Lehman Brothers went under. its debts (liabilities) were much greater than its assets. Did Lehman Brothers experience a solvency or a liquidity issue? [4 marks] 1. For the production function Y = K951 5, MPL = 0.5K"'L>. Since a profit-maximizing firm hires labor until MPL - W/P, the labor demand function in this case is L" = 0.25K/(W/P] A. Suppose the economy has 1,000 units of capital and a labor force of 1,000 workers. What is the equilibrium value of the real wage, W/P? And in this equilibrium, what are employment, output and the total amount earned by workers? (You should find that the real wage is %% unit of output.) B. Now suppose the government passes a law requiring firms to pay workers a real wage of 1 unit of output. What are employment, output and total labor earnings now? (Refer to Figure 6-3 on p. 183. When there is a rigid real wage above the equilibrium real wage, employment is demand-determined.} 2. Suppose that the economy is in long-run equilibrium when a catastrophic storm destroys a large quantity of crops and reduces food production. A. Use the AD-LRAS-SRAS model to graphically illustrate the short-run and long-run responses to the shock. B. Now explain how the economy moves from the old equilibrium to the new one. 3. A. Suppose that the AD curve is given by Y = 4(M/P), the LRAS curve is parallel to the y-axis, centered at Y = 4,000 and the SRAS curve is parallel to the x-axis, at P = 1.0. Also assume that the money supply is M = 1,000. What are the long-run values of P and Y? B. Suppose now that the AD curve sifts to Y = 2(M/P). What are the short-run values of P and Y? Given that the AD curve stays at this new location, what are the values of P and Y after the economy is again in a long-run equilibrium? C. Finally, draw an AD-LRAS-SRAS diagram that depicts both the situation before, and the situation after, the demand shock. (L.e., put both AD curves on the same AD-LRAS-SRAS diagram. The AD curves are nonlinear, but for this diagram, you can draw them as straight lines.) 4. Suppose that the economy is characterized by these equations: Y = C+1+G C = 250 + 0.8(Y - T) I = 1,000 G = 1,000 T = 1,000*7. The Saga Food Company produces one type of frozen dinner sold directly to consumers and to restaurants. The demand and marginal revenue functions for Saga's frozen dinner by consumers (market 1) and restaurants (market 2) are, respectively, = 160 - 10P, or P = 16-0.10, and MR, = 16 - 0.2Q, 22 = 200 -20P, or P, = 10-0.050, and MR, = 10-0.102 Saga's total cost function is Dinve TC = 120 + 40 Draw a figure showing (a) the demand, marginal revenue, and marginal cost curves faced by the firm; (b) the best level of output of the firm and how the firm should distribute sales in each market in order to maximize total profits with third-degree price discrimination; (c) the price and total revenue of the firm in each market with third-degree price discrimination; (d) the profit per unit and in total with third-degree price discrimination; and (e) the output, price, total revenue, and profit per unit and in total in the absence of price discrimination
