Question

Anne and Beth work for NETFinancial (firm that sells Economic Forecasting Services- EFS). Their productivity measures and constraints per 40 hour work week are: Anne is capable of selling 10 EFS contracts or she is capable of underwriting 20 EFS contracts; Beth is capable of selling 32 EFS contracts or she is capable of underwriting 40 EFS contracts. Commission on the sale of an EFS contract is $500 per contract, and the underwriting fee for an EFS contract is $1000.

To receive payment the forecasting contract has to be sold and unwritten in the same week.

What is the Maximum amount Anne and Beth can make per week working alone? What is the Gain from Cooperation if they trade services? What happens to the Dead Weight Loss if they cooperate? Explain the compensation payment necessary between Anne and Beth to get Cooperation?

Show your table of calculations.

Answer 1

Answer:

As given the above information to receive payment the forecasting contract has to be sold and unwritten in the same week.

Selling contracts is a bottleneck for Anne and she can receive payments for 10

She was Payment earned in a week is

= 10 *(1000+500) = $ 15000.

For 32 Forecasting contacts capable of receiving payment earning in a week.

=$32 *1500= $48000

She can underwrite 40 EFS contracts per week.

For every 10 contracts Beth underwrites, she can sell 8.

Beth distributes her ~83.5% (the time of the week in selling).

And Beth will be able to sell, 83.5% of 64 = 53 (contracts and underwrite 13 contracts)

If Beth solely focuses on selling, she can sell a total of 64contracts, addition of 32 contracts sold for letting go of 40underwriting work.

as a whole contracts, both can underwrite 53 (40+13) contracts and sell53 contracts.

AMount earned = 53*1500 = 79500

Gain = 79500 - 48000 - 15000 = $16500 (dead weight loss due to inefficiency by working alonereduces)

Maximum contracts that can be sold and underwritten alone = 10 +32 = 42

Extra contracts that are fulfilled due to collaboration =53-42 = 11

On that 11 contracts must be divided equally and added to individual earning capacity.

Finally compensation payment necessary between Anne and Beth to get Cooperation is,

Anne earns = 15000 + 11/2 * (1500) = 15000 + 8250 =$23250

Beth earns = 48000 + 8250 = $56250