microeconomic theory

Solution Preview

The Book that we are using to find the answer is Microeconomics for MBAs the Economic Way of thinking for Managers by Richard B. McKenziie and Dwight R. Lee

Please answer the following three questions from the perspective of basic microeconomic theory as applied to the world of buying and selling goods and services. Keep in mind that business are both sellers of goods and services and buyers of goods and services such as labor services and goods and services supplied by other business firms. Also remember that successful firms know how to satisfy those to whom they sell and know how to manage their own costs of production. Firms which fail in these activities do not survive for very long.
1. Chapter 3 of your textbook discusses Principles of Rational Behavior. In Part II of that chapter the issue of â??opportunistic behaviorâ? is raised, specifically an issue described as â??The Last Period Problem.â? In Part II of Chapter 5 the issue of honesty in business is addressed. Here is your assignment: Starting with the so-called Last Period problem, analyze honesty in business with special attention to incentives, transparency, and rewards and punishments.
The last period problem is one of opportunistic behavior. In a contract if there is well defined last period there is a high chance of cheating. The reason is that during the last period there is hardly any penalty for cheating. Empirically cheating has been seen more likely in the last period than at any other time in the relationship. During the commencement of a contract there is little incentive to cheat, the contracting parties do not want to break the contract because the punishments are high for breaking the contract. For instance, if the contract is broken at the beginning the other party will refrain from carrying out their side of the contract and the punishment will be high. On the other hand complying with the terms of the contract has high rewards. Further, during the beginning of the contract the level of transparency is likely to be high
From the perspective of buying and selling if there is a clause in the buyer seller relationship that clearly marks the end of the relationship, the buyer or the seller are likely to cheat when they reach the end of the relationship. In the initial period of contract there is a preference among both the buyers and seller to be honest and maintain the relationship. The marginal utility of being dishonest during opportunistic periods may be high and may tempt businesses to ...