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Author Question: Sarah and Claire are sisters. Their aunt gave 10 cookies to Sarah and asked her to share some with ... (Read 60 times)

abarnes

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on: Jun 29, 2018
Sarah and Claire are sisters. Their aunt gave 10 cookies to Sarah and asked her to share some with Claire. She could choose how many she would give her, but if Claire was not happy with her share, her aunt would take back all the cookies.
 
  a) How should Sarah decide how many cookies to give Claire if Claire prefers more cookies to fewer cookies? b) Will there be any change in her decision if she knows that Claire values fairness?

Question 2

Which of the following statements explains why monopolies weaken the functioning of the invisible hand?
 
  A) A monopoly is a price taker.
  B) The quantity produced by a monopoly is too low.
  C) Monopolies face an upward sloping demand curve.
  D) A monopoly sets the price of its good below marginal costs.


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nickk12214

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Reply #1 on: Jun 29, 2018
Answer to Question 1

a) Sarah should decide how many cookies to give Claire using the technique of backward induction. Because Claire prefers more cookies to fewer cookies, she will always accept Sarah's offer. Given that Claire will always accept her offer, Sarah should offer the lowest possible number of cookies to Claire.
b) If Sarah knows that Claire values fairness, she will realize that Claire will not accept an unfair share of cookies. Because neither of them will get any cookies if Claire rejects the offer, Sarah will offer an equal share to Claire.

Answer to Question 2

B


abarnes

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Reply 2 on: Jun 29, 2018
Thanks for the timely response, appreciate it

tkempin

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Reply 3 on: Yesterday
Excellent

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