ASSIGNMENT 2: Answer Question

QUESTION 1 – All sub-questions must be answered:

(A) – 50% (700 words)

A food manufacturer introduces a new snack and negotiates contract terms with an advertiser for a multimedia campaign to promote the snack. If the snack is a success, the manufacturer will make revenue of £80 mils. If the snack flops the manufacturer will lose £8 mils. If the advertiser puts a lot of effort in the promotion campaign targeting different demographic groups and running clever adverts, the probability of success of the snack is 75%. A campaign with a lot of effort costs the advertiser £3mils. Without such effort the probability of success is 20%. The manufacturer cannot observe the effort of the advertiser.

The advertiser offers the following choices to the manufacturer. Either a flat fee of £7mils, or a basic fee of £3mils and a 10% share of the £80 mils.
Determine the relevant payouts for all of the possible outcomes, and draw the extensive form of the game played by the manufacturer and the advertiser under the two different payment contracts, and find the equilibrium outcome to this game.

(B) – 50% (700 words)

‘For a firm, the advantages and disadvantages of relying on the market versus relying on internal organisation can be expressed in terms of a trade-off between technical efficiency and agency efficiency’. Do you agree or disagree with his statement? Justify your answer.


  •  Lecture notes
  •  Douma, S. and Schreuder, H., Economic Approaches to Organisations. 4th.ed. Financial

Times Prentice Hall, Ch 7: Agency Theory; Ch 8: Transaction cost economics

  •  Groenewegen, J. Spithoven, A., Van der Berg, A. 2010. Institutional Economics. Ch 6:


  •  Douma, S. and Schreuder, H. 2008. Economic Approaches to Organisations. 4th edition,

Ch 5: Game theory

  •  Goolsbee, A., Levitt, S, Syverson, C. 2013. Microeconomics, MacMillan – Palgrave,

International Edition, Chapter 12: Game Theory

  •  Varian, H. 2014. Intermediate Microeconomics, 9th edition, Norton & Co. New York., Ch

29: Game theory; Ch 30: Game applications

  •  Posner, R.A. 2010. From the new institutional economics to organization economics:

with applications to corporate governance, government agencies, and legal institutions. Journal of Institutional Economics 6: 1 – 37. DOI: 10.1017/S1744137409990270

Submission date: Essays must be submitted electronically at the Blackboard by

18.00hs of 17 April (week 12). No extensions will be granted.

Plagiarism is the act of taking or copying someone else’s work, including another student’s, and presenting it as if it were one’s own. The University’s policy is that plagiarism, whether deliberate or unintentional, is a form of cheating and is unacceptable.
The University has a plagiarism policy in place with the framework of penalties available at

Exceeding the word limit
Penalties for exceeding the word limit:

Up to 10%: no penalty

11-20%: 10% deduction

>20%: fail, with a mark of zero awarded