Question
Two partners choose effort levels 1 and 2 that determine output worth = 31 + 22. Suppose that each partner has a marginal cost of
Two partners choose effort levels 1 and 2 that determine output worth = 31 + 22. Suppose that each partner has a marginal cost of effort equal to her effort. a) What is the total marginal benefit of Partner 1's effort? What is the total marginal benefit of Partner 2's effort? Explain your answer. b) What is the efficient level of effort for Partner 1? What is the efficient level of effort for Partner 2? Explain your answer. c) Assume that each partner owns 50% of the partnership. How much effort will Partner 1 exert? How much effort will Partner 2 exert? What is the level of output that partnership produces? Explain your answer. d) The partnership is looking for a change, they want to produce more. Can you find different ownership shares for the two partners that would yield a higher output? Explain your answer. e) What are the ownership shares that would maximise output production? What is the level of output under this ownership structure? What are the total effort costs under this ownership structure? Explain your answer.
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