Question

Q1. Headquartered in Plainfield, Indiana is the Chimney Safety Institute of America which, among other things, certifies Chimney Sweeps. There are three steps to becoming certified: purchase (and study) $515 of books, attend an in-person or online review or six-day training school (each of which is several hundred to over a thousand dollars), and pass an exam (again, a few hundred dollars). After this, there is an annual $229 certification fee. The website says that being certified proves “you’re one of the best,” and that certification “is the measure of a chimney sweep’s knowledge about the evaluation and maintenance of chimney and venting systems.” Presumably, the CSIA would argue that its certification protects consumers; given the information presented this week, aside from ensuring high quality chimney sweeps, why else might existing chimney sweeps find it in their interest to protect the certification system? Select one:

a. The certification system encourages the entry of chimney sweeps into the industry since it weeds out sellers who are only interested in making a quick profit. The stature of having a certification is attractive to potential entrepreneurs, and the supply of chimney sweep services (and the labor supply of chimney sweeps) is increased by having the certification system.

b. Currently-certified chimney sweeps have unique knowledge to accurately judge the subtle characteristics of chimney design that most consumers would never notice, but that still affect the longevity of their chimneys. Without the certification system, consumers would consistently be ripped off by chimney sweeps without this knowledge.

c. The certification system is effectively a barrier to entry which hinders new chimney sweeps from competing with established chimney sweeps; the supply of chimney sweep labor and chimney sweep services is thereby decreased, and prices and profit are higher than would exist in a more open, competitive market.

d. Most certification is done for occupations that sell physical goods, not services like chimney sweeping. The entry-barrier problem with occupational licensing only applies to sellers of physical goods, not services, so certified chimney sweeps support the certification system since it encourages competitiveness in their industry, which benefits them and consumers alike.

Q2. What side effects might the (one-time and annual) fees, training, and exam introduce into the chimney sweep market?

Select one:

a. The fees, training, and exam are more likely to exclude low-income entrepreneurs from earning income by being a chimney sweep. It may (slightly) exacerbate income inequality since only higher-income individuals would consider the fees, training, and exam to be affordable, who thereafter would be able to earn income as a chimney sweep.

b. The low fee helps to ensure that uncertified chimney sweeps will not enter the market and attempt to sell high-priced chimney sweep services to compete with the lower-priced products of certified chimney sweeps. The fees, training, and exam help to prevent new entrants from exercising too much market power.

c. The fee and exam are going to encourage only serious entrepreneurs to become chimney sweeps. Those who do not really want to become chimney sweeps will be dissuaded by the requirements, thus ultimately improving the quality and lowering the price of chimney sweep services for consumers.

d. Being known as a certified chimney sweep, who passed an exam, will improve the reputation of certified chimney sweeps. The fee payments, however, do nothing to affect the chimney sweep's reputation. Since both the exam, training, and fees are mandatory, it is unclear whether the requirements will improve the quality and lower the price of chimney sweep services in Louisiana.

Q3.  You may be familiar with stories (even from your own experience) of employees who choose to denigrate or subtly sabotage their fellow employees rather than focusing on how they themselves can be better or more productive. Often, a company may notice not that a single employee behaves this way, but that many, most, or all of them do. It seems obvious that spending time and energy figuring out how to make other employees appear worse, instead of spending that time and energy to make yourself better, is harmful to the company, but the behavior continues to be seen among large groups of workers. How might game theory offer an explanation for this behavior?

Select one:

a. The behavior is a result of a prisoners' dilemma. An employee finds that his own position is improved if a fellow employee appears worse, regardless of whether the fellow employee engages in that sabotaging behavior or not. While it is best for everyone (and the company) overall to not have any of that behavior occur, the result is that it will happen frequently because it is in each employee's individual best interest to sabotage.

b. An employee will engage in sabotaging behavior because doing so is a one-shot game. The employee knows that it will only take a single instance of a fellow employee appearing to be negligent to get that fellow employee fired, so the sabotaging employee will remain hired but with fewer fellow employees with which to compete.

c. The sabotaging behavior is a dominated strategy that always harms the company and the employees. Since it continues to occur, though, then employees have failed to eliminate it as a strategy, and since it hasn't been eliminated, it becomes the most likely outcome.

d. The sabotaging behavior is the result of a sequential game, where the employees attempt to be the "first mover" and be the first to sabotage their fellow employees. If a fellow employee is the first one to appear worse to the managers (and I am thus the first one to appear better to the managers), then if I am a later victim of sabotage by my fellow employee, the manager won't think as badly of me since it happened later in time.

Answer 1

Q1)

Based on the case presented to enter the business one has to make significant time, money investments in addition to learning efforts. Considering the nature of service, such elaborate procedure of acquiring certification is essentially an entry barrier. Thus C is the answer. Other statements have wrong positions or extraneous arguments

Q2) b) says lower priced certified.. which is not mentioned c) no link to lowering of prices as chimney seeps are limited in number because of certification d) there is no doubt that training will increase quality , so no ambiguity

the above are wrong statements, thus a) is correct. All the points made are valid.

Q3) If it were a sequential game then each employee would wish other employee well expecting the same in return. And only on the last move will bad mouth. Thus D is ruled out.

It is not a one shot but a continuing game as one bad mouthing will not cost the job. This rules out B

Statement C not even makes any sense, first calling it a dominated strategy, then eliminated and so on.

The answer is A If everyone was praising everyone they may not look bad in manager's eyes but also do not have an edge over any other employee. So in the competitive work environment it is much more rewarding if others praise you while you generate negative report of others. But when everyone starts to apply this logic then they end up in box with worst return in the payoff matrix for everyone.