Question

Consider the following monopoly screening problem: A government

agency writes a procurement contract with a firm to deliver q units of

a good. The firm has constant marginal cost c, so that its profit is

P − cq, where P denotes the payment for the transaction. The firm’s

cost is private information and may be either high (cH) or low (cL,

with 0 < cL < cH). The agency’s prior belief about the firm’s cost

is Pr (c = cL) = β, and it makes a take-it-or-leave-it-offer to the firm

(whose default profit is zero).

(a) If B(q) denotes the benefit to the agency of obtaining q units

(assume B0 > 0 and B00 < 0), what is the optimal contract for the

agency?

(b) Compare this second-best solution in part (a) with the first-best

one, obtained if costs are known by the agency. Discuss the results.

(c) What would the first-best and second-best solutions be if c, instead

of taking two values, were uniformly distributed on [c, c¯], with

0 < c < c¯?​

Answer 1

Answer:

sorry I can't understand this question