Answers to Odd-Numbered Problems 29contract acts like a “tax” set exactly equal to the harm nondelivery
inflicts on firm Y. So firm X delivers if and only if its cost is less than
the benefit firm Y stands to gain. Of course, the penalty serves to fully
insure firm Y.- a. Having only imperfect information, the winning bidder may have
been overly optimistic about the player’s “true” long-run ability. (For
instance, the winning team may not have known that the pitcher had
a sore arm, a bad attitude, and so on.) The winning bidder might
ask itself, “If this pitcher is so great, why didn’t his original team
retain him?”
b. If a ball player is guaranteed exorbitant sums for the duration of his
contract, he may have a reduced incentive to give a 100 percent
effort on the field (and therefore perform poorly). Obviously, his
incentive increases in the last year of his contract if he expects to
become a free agent.
c. An owner should estimate what a player is worth based on the best
available information, and place a bid somewhat below this estimate
in order to acquire the ball player at a profit. - Although team decision making can generate valuable information and
promote problem solving (five heads are better than one), it is also costly
(enlisting additional human resources) and time consuming. In addition,
team decision making may suffer from free-rider problems; that is, team
members may shirk and expect other members to pick up the slack. For
these reasons, it is important to limit the size of workable teams.
Chapter 15
- a. The plaintiff’s expected court receipt (net of legal costs) is 50,000
15,000 $35,000. The defendant’s expected court payment
(including legal costs) is 50,000 15,000 $65,000. The zone of
agreement lies between these two amounts. If each side believes its
winning chances are 60 percent, then the plaintiff’s expected court
receipt is $45,000 and the defendant’s expected court payment is
$55,000. The parties’ optimistic (and conflicting) opinions have
reduced the zone of agreement.
b. When the potential damages are $200,000, the expected court
outcomes of the disputants become $105,000 and $95,000. Now there
is no zone of agreement. The plaintiff’s minimally acceptable
settlement exceeds the defendant’s maximum acceptable payment.
c. Facing a nuisance suit, the defendant knows it will win its court case
but still faces an expected cost equal to its legal fees. Thus, it
rationally might settle out of court for any amount smaller than this.
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