In case you haven't received my e-mail, there was a problem with the values of e that I sent out before. You should divide the initial value of e by 4; for example, if you previously had e=2, you should use e=0.5.
The due date for the exam has been pushed back by 1 hour, to 12:05am.
The BBQ tonight has been canceled; instead, I'll be at the CoHo from 10-11. You can drop off your exam then, and I'll buy you a drink (of the legal variety).
CRM
Saturday, June 9, 2007
Final Exam Issues
Here are some answers to the questions I received about the final exam. The values for alpha and e are posted in the Course Materials section of the web site.
I'm going to be away from the computer for the next few hours; if you have a real emergency, please call me. Otherwise, good luck and I hope to see you tonight! (If you're done with the exam and plan on coming by, please do drop a note so I have a sense as to how many people will be here.) CRM
Note: for question 1.1, there are some different ways of calculating V(0), V(1), etc. Just document however you find these values. Your answers to the later questions will be graded on the basis of consistency with your answers with those questions. Therefore, even if your value of V(0) is wrong, if your answers to later questions are consistent with the values you found, they will be given full credit. Note in particular that in the hint, the value x/r for a stream of x received forever is true if you receive that x after one year. I should have specified that in the hint. We will accept answers that either specify the value as of the date of discovery, or the value as starting one year from the date of discovery. Please specify in your answer which it is.
Question 1: Prize vs. Patent
Question: You say that all firms who make the discovery have an equal probability of reaping the reward. Do you mean that they have a probability of getting lucky, and getting all the benefits from the patent, and the other firm (even though they got it at the same time) gets nothing? Or do you mean to say what it has been in the past where if 2 invent, they split the profits each getting 1/2, if 3 invent they split and each gets 1/3, and so on? I know you say that if 2 firms invent they each get z/2, but I wasn't sure if that was the expected value of their profits or not.
Answer: Your first analysis is correct. If two or more firms make the discovery at the same time, each has an equal chance of being selected the winner of the prize or being granted the patent. If it were the other way, then if two firms had a patent for it, Bertrand competition would reduce price to cost and the patent would be worthless!
Question: On the very first question, part 1 of question 1, I was wondering if we are to assume that for V(0) a firm will have earned the prize of Y since no patent is being offered.
Answer: For 1.1, disregard any welfare effects of a prize. These enter the question later.
Question: Is the demand function P=50,000-0.01Q a yearly demand function?
Answer: Yes.
Question: In calculating V(T), the net present value of discovery, do we
include the investment costs?
Answer: No; it's once the discovery has been made.
Question: For question 1 part 1, does the firm charge monopoly price while it has the patent and then unit cost?
Answer: Yes.
Question: The first period that the firm will get a cash flow from the production after its discovery today is 1 year from now, right? That is the first cash flow of the profits should be discounted by rho rather than have no discount. Is that correct?
Answer [AMENDED]: You can do this either way; please specify in your answer how you calculated it.
Qustion 2: The Principal-Agent Problem
Question: In question 2.2, when you say assume 0 costs, does that mean you're also not subtracting the chef's wage from their profits?
Answer: For question 2.2, yes; ignore the chef's wages. For question 2.3, you should factor those wages in.
Question: What happens if my square root of wage value is negative? Do I just keep going with the equation using its positive squared value or try to explain why that wage cannot exist?
Answer: For this question, it's a good idea to work in utilities first, not wages: that is, let v=sqrt(w) and solve the question using v's, then substitute in w = v^2 at the end. That ensures everything is positive. You can see the posted solution for the final problem set for an explanation of this technique.
I'm going to be away from the computer for the next few hours; if you have a real emergency, please call me. Otherwise, good luck and I hope to see you tonight! (If you're done with the exam and plan on coming by, please do drop a note so I have a sense as to how many people will be here.) CRM
Note: for question 1.1, there are some different ways of calculating V(0), V(1), etc. Just document however you find these values. Your answers to the later questions will be graded on the basis of consistency with your answers with those questions. Therefore, even if your value of V(0) is wrong, if your answers to later questions are consistent with the values you found, they will be given full credit. Note in particular that in the hint, the value x/r for a stream of x received forever is true if you receive that x after one year. I should have specified that in the hint. We will accept answers that either specify the value as of the date of discovery, or the value as starting one year from the date of discovery. Please specify in your answer which it is.
Question 1: Prize vs. Patent
Question: You say that all firms who make the discovery have an equal probability of reaping the reward. Do you mean that they have a probability of getting lucky, and getting all the benefits from the patent, and the other firm (even though they got it at the same time) gets nothing? Or do you mean to say what it has been in the past where if 2 invent, they split the profits each getting 1/2, if 3 invent they split and each gets 1/3, and so on? I know you say that if 2 firms invent they each get z/2, but I wasn't sure if that was the expected value of their profits or not.
Answer: Your first analysis is correct. If two or more firms make the discovery at the same time, each has an equal chance of being selected the winner of the prize or being granted the patent. If it were the other way, then if two firms had a patent for it, Bertrand competition would reduce price to cost and the patent would be worthless!
Question: On the very first question, part 1 of question 1, I was wondering if we are to assume that for V(0) a firm will have earned the prize of Y since no patent is being offered.
Answer: For 1.1, disregard any welfare effects of a prize. These enter the question later.
Question: Is the demand function P=50,000-0.01Q a yearly demand function?
Answer: Yes.
Question: In calculating V(T), the net present value of discovery, do we
include the investment costs?
Answer: No; it's once the discovery has been made.
Question: For question 1 part 1, does the firm charge monopoly price while it has the patent and then unit cost?
Answer: Yes.
Question: The first period that the firm will get a cash flow from the production after its discovery today is 1 year from now, right? That is the first cash flow of the profits should be discounted by rho rather than have no discount. Is that correct?
Answer [AMENDED]: You can do this either way; please specify in your answer how you calculated it.
Qustion 2: The Principal-Agent Problem
Question: In question 2.2, when you say assume 0 costs, does that mean you're also not subtracting the chef's wage from their profits?
Answer: For question 2.2, yes; ignore the chef's wages. For question 2.3, you should factor those wages in.
Question: What happens if my square root of wage value is negative? Do I just keep going with the equation using its positive squared value or try to explain why that wage cannot exist?
Answer: For this question, it's a good idea to work in utilities first, not wages: that is, let v=sqrt(w) and solve the question using v's, then substitute in w = v^2 at the end. That ensures everything is positive. You can see the posted solution for the final problem set for an explanation of this technique.
Wednesday, June 6, 2007
Search Theory and Advertising
Sprint just launched a new service, the "Slifter," which allows consumers to use GPS technology to find goods in retail stores through their cell phones.
"The service allows shoppers to learn where they can buy, say, a certain iPod model or new Nike sneaker, based on a location signal, and at what price."
This will significantly reduce search costs - which, in the long, run, if widely used, will lower reservation costs and prices.
I've posted the full WSJ article as a link.
"The service allows shoppers to learn where they can buy, say, a certain iPod model or new Nike sneaker, based on a location signal, and at what price."
This will significantly reduce search costs - which, in the long, run, if widely used, will lower reservation costs and prices.
I've posted the full WSJ article as a link.
Supermarket Differentiation
Here's an article from the WSJ on how supermarkets have been differentiating themselves in order to compete against Walmart and gain market share. Some of it involves higher quality goods. But it also includes different atmospheres that appeal to consumers. Here's the link to the article: http://online.wsj.com/article/SB118109301239325910.html?mod=hpp_us_editors_picks
Thursday, May 31, 2007
EMI signs deal with YouTube
EMI just signed a deal with YouTube to make their music videos available online for free. But unlike with iTunes, EMI is the last of the big four record companies to partner with YouTube.
What would make record companies willing to put their music on YouTube but not on iTunes?
Why would EMI hold out while all the other companies are signing on?
Here's the article:
EMI and YouTube Set Licensing Accord
By SHIRA OVIDE (Wall Street Journal)
June 1, 2007
NEW YORK -- EMI Group PLC became the latest major recording company to strike a licensing deal with Google Inc.'s YouTube.
EMI Music, the music division of EMI Group, will make music videos and recordings available on Google's popular online-video Web site. YouTube visitors will also be able to include EMI content in their own video postings on the site.
"With this deal, all four of the world's major music companies are now official YouTube partners," Chad Hurley, chief executive and co-founder of YouTube, said in a press release Thursday.
Citing copyright hurdles, EMI had been the lone holdout of the four major global music companies in striking a licensing agreement with YouTube.
EMI said it will work with YouTube and Google to develop business models for content that YouTube users create with EMI-owned and copyrighted audio and video. EMI is responsible for music groups such as Coldplay and David Bowie.
YouTube will help EMI track its content on the Web site and compensate the company and its music acts for relevant use. EMI also will have the ability to ask YouTube to remove its content from the Web site.
What would make record companies willing to put their music on YouTube but not on iTunes?
Why would EMI hold out while all the other companies are signing on?
Here's the article:
EMI and YouTube Set Licensing Accord
By SHIRA OVIDE (Wall Street Journal)
June 1, 2007
NEW YORK -- EMI Group PLC became the latest major recording company to strike a licensing deal with Google Inc.'s YouTube.
EMI Music, the music division of EMI Group, will make music videos and recordings available on Google's popular online-video Web site. YouTube visitors will also be able to include EMI content in their own video postings on the site.
"With this deal, all four of the world's major music companies are now official YouTube partners," Chad Hurley, chief executive and co-founder of YouTube, said in a press release Thursday.
Citing copyright hurdles, EMI had been the lone holdout of the four major global music companies in striking a licensing agreement with YouTube.
EMI said it will work with YouTube and Google to develop business models for content that YouTube users create with EMI-owned and copyrighted audio and video. EMI is responsible for music groups such as Coldplay and David Bowie.
YouTube will help EMI track its content on the Web site and compensate the company and its music acts for relevant use. EMI also will have the ability to ask YouTube to remove its content from the Web site.
Matching and Price Competition: Would Personalized Prices Help?
Georgy Artemov, a Ph.D. candidate, published a paper analyzing the possible welfare from the NRMP switching to a differentiated salaries model. It specifically focused on the effect of imperfect information of preferences.
Here's the abstract:
We analyze the generalized deferred-acceptance algorithm when
preferences are known with an error. This algorithm incorporates personalized
salaries and is considered as a replacement for the current
algorithm for National Resident Matching Program (NRMP). Maintaining
Bulow and Levin’s (2006) assumption on preferences, we show
that an error in preferences of a worker propagates through the algorithm,
leading to a change in the salary of every more productive
worker. Thus, relatively small individual errors accumulate toward the
top and may lead to highly distorted salaries for top workers the same
way as mild compression translates into highly compressed salaries on
the top in the Bulow and Levin study of the current NRMP algorithm.
The article is slightly mathy, it reads a lot like the textbook, but it's interesting nonetheless. He uses a lot of the assumptions from Levin's model we saw in class, and it goes into more depth about the deferred acceptance algorithm than we went over in class. It's an interesting perspective! Check it out at: http://www.econ.brown.edu/students/Georgy_Artemov/artemov_personalized_mistakes_IJGT_f.pdf
Here's the abstract:
We analyze the generalized deferred-acceptance algorithm when
preferences are known with an error. This algorithm incorporates personalized
salaries and is considered as a replacement for the current
algorithm for National Resident Matching Program (NRMP). Maintaining
Bulow and Levin’s (2006) assumption on preferences, we show
that an error in preferences of a worker propagates through the algorithm,
leading to a change in the salary of every more productive
worker. Thus, relatively small individual errors accumulate toward the
top and may lead to highly distorted salaries for top workers the same
way as mild compression translates into highly compressed salaries on
the top in the Bulow and Levin study of the current NRMP algorithm.
The article is slightly mathy, it reads a lot like the textbook, but it's interesting nonetheless. He uses a lot of the assumptions from Levin's model we saw in class, and it goes into more depth about the deferred acceptance algorithm than we went over in class. It's an interesting perspective! Check it out at: http://www.econ.brown.edu/students/Georgy_Artemov/artemov_personalized_mistakes_IJGT_f.pdf
Tuesday, May 29, 2007
The Marriage Market
Here are some readings for Thursday's class...
A piece for the Aplia Econ Blog that I wrote a while ago. The NYT article it references is pretty interesting...
A comment by Al Roth and Muriel Niederle on some of their findings about the NRMP and wages...
An article in the WSJ about the matching mechanism recently introduced in the market for Ph.D. economists...
Robert Frank on polygamy and marriage search.
More to come. Feel free to post links to other articles in comments...
A piece for the Aplia Econ Blog that I wrote a while ago. The NYT article it references is pretty interesting...
A comment by Al Roth and Muriel Niederle on some of their findings about the NRMP and wages...
An article in the WSJ about the matching mechanism recently introduced in the market for Ph.D. economists...
Robert Frank on polygamy and marriage search.
More to come. Feel free to post links to other articles in comments...
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