Essay
The partnership of Leontief Associates has the technology Y = B min (e1, e2), where Y is total output, ei is the effort of person i(i = 1, 2), and B >1. Since there are two partners, the income of each person is equal to half of total team output. The utility functions of the two people are identical: ui = yi - ei2.
i)Suppose the effort of person 2 is fixed. Find the optimal effort for person 1. (Hint: consider two cases separately, where e2 >B/4, and e2 < B/4).
ii)There is more than one Nash equilibrium for this model. Which effort pairs satisfy the requirements of Nash equilibrium? Do we have a Nash equilibrium when each person chooses the efficient level of effort?
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i)y1 = B e1/2 if e1 < = e2, and y1 = B e2/2 if e1 >...View Answer
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