This is the last Excel Homework.

This homework is on extensions of the basic Shapiro and Stiglitz model, with a particular focus on making the monitoring intensity a choice variable.

You should watch the video presentation of the basic model first. This is a full lecture on the math of the model. It takes about a half hour.

xlsx file

Hello. I already watched the video but I'm still having trouble figuring out the first problem. I assume that you must equate the MB(q) and MC(q) functions, solve for q and then plug the result to either equation to get the value of the optimal monitoring intensity. Im also assuming that the little arrow next to the q in the MB(q) function represents an exponent? If I'm not approaching this problem correctly can I get a hint on how to start? Thank you.

ReplyDeleteOnce you've solved for q, that is it because q is the monitoring intensity. I don't see any arrow next to the q in the marginal benefit function. It should read

ReplyDeleteMB(q) = (r+b)e/q^2.

In other words, the numerator is (r+b)e and the denominator is q squared.