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Af1605 Introduction to Economics

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Hong Kong Polytechnic University

First Semester 2015/16

AF1605 Introduction to Economics

Problem Set:

(Q5.5,6.1)

Student Name:

(Ip Cheuk Yan)

Student ID:

(15064733d)

Programme enrolled:

(e.g. BD)

Subject Lecturer:

(Dr Vincent Mok)

Subject Tutor:

(Dr Vincent Mok)

Tutorial Group:

(TUT001)

Tutorial Day and Time:

(Monday 12:30am)

Number of words:

(899 words)


AF1605 Introduction to Economics

First Semester 2015/16

Results of Presentation and Written Report

Mark of Question 1:

Mark of Question 2:

Total mark of report:

Grade of report:

Grade of presentation:

Q5.5a[pic 1]

[pic 2]

Give oneself $10,000 bonus

Give the other salesman $30,000 bonus

Give oneself $10,000 bonus

Give oneself $10,000 bonus

Give oneself $10,000 bonus

Give oneself

$10,000 bonus

($10,000 , $10,000)

($40,000 ,      $0     )

Give the other salesman $30,000 bonus

  ( $0       ,  $40,000)

($30,000 , $30,000)

There are totally four possible outcomes. They are both Danny and Paul choose (a) $10,000, both Danny and Paul choose (b) $30,000, Danny chooses (a) and Paul chooses (b) so Danny has $40,000 and Paul has $0 and Danny chooses (b) and Paul chooses (a) so Danny has $0 and Paul has $40,000

b) The best choice is both of Danny and Paul give the other salesman $30,000 of bonus so that they can both receive the $30,000 of bonus and this can benefit to both of them. For example, if Danny gives oneself $10,000 while Paul gives the other salesman $ 30,000, Danny can get $(10,000 + 30,000)= $40000, but Paul get $0, so it is not the best choice.

c) Their collusion is likely to fail because both of them may believe the other will choose to give the other salesman $30,000 bonus. However, it would be individually rational for each of them to cheat on a collusive agreement and increase output. For example, Danny believes he can get $3,000 if he follows the collusion or get $40,000 if he does not follow the collusion and choose to give oneself $10,000. Both of them are more willing to get $40,000, so they will not follow their collusion and give oneself $30,000.

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