Question

Consider the following relationship between firm A and firm B. Firm A wishes to buy an input I from B. Firm A wants an input that is specialised to its production processes; a specialised input I costs B $10 to make. Alternatively, B can deliver a low-quality product that costs $0 to produce, but is of no benefit to A. The timing is as follows: if A decides to trade, A agrees to pay firm B a price of p = $30 for a high-quality input I; payment p = $30 is then made from A to B; B delivers the input that can either be of high or low quality; finally, A discovers the quality of the input that has been delivered.

Answer 1

. 16. - If its firm B provides high quality input, then pay off in every period is T. 20 + 200 + 200.... 20 The correct option in (d)] 17. Jf firm B cheats; its payoff in first period is (30 -0)- 30. Then firm A Obserwes this and bus the generic input for 10. The profit from generic input in (10-5)=5 : Ta 30 + 56+ 58+ .... = 30 + 50 [i+ S +..] 18. The correct option is: [ca) The firm will provide oney high quality - Texto a, 27, 30, - 2058 1-6 1- 6 or, 20-50 7,30 ar, 20- 58 ? 30 - 308 an, 30d-58; 30-20 or, 258710 .:.87 Š The correct option is: (a)