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Week 1 Discussion – Problem-Solving and Post-Investment Holdup
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Preparation
In this week’s discussion, you will be asked to review a selection of scenarios and discuss how they may be exemplifying the concept of the post-investment holdup, in addition to other economic concepts, such as sunk and stranded costs. To be prepared to complete this discussion, make sure you have completed your textbook readings, especially Chapter 5.
If you need further information regarding holdup problems, refer to the following:
Your instructor may post additional resources to help further explain concepts related to this week’s discussion.
Context
In Chapter 5 of Managerial Economics, Froeb discusses post-investment holdup as a sunk cost problem associated with contract-specific fixed investments. The modern theory of contracts is sometimes called the theory of joining wills, which simply means when parties make an agreement, they are joining together to complete an endeavor of mutual interest. The problem with all contracts that endure over time is that not all potential challenges can be anticipated. The idea of joining wills is that parties will attempt to seek accommodations to advance their mutual interest so long as the return on the invested activity pays off. Froeb illustrates the idea by the example of marriage as a contract.
Instructions
Review the three scenarios below. Look for which, if any, of these scenarios presents an example of post-investment holdup.
- Your firm conducted a search for a new chief financial officer and hired a highly qualified candidate with a yearly salary of $250,000. After six months, the person left to join another firm.
- Your firm has an exclusive contract to assemble automobile seats for several luxury models. Almost 100% of the materials are imported and, of those, over 50% include parts manufactured in China. All the prices of the parts from China increased by 25% when the United States imposed tariffs on China. Your company has informed all its customers that increased costs must be passed on for your firm to continue supplying the seats. All your customers reluctantly agreed to pay the additional cost.
- Your company took note of your progress toward your MBA, and when the director for customer services left the company, you were asked to take over as interim director. You were encouraged to apply for the full-time position once you got your MBA. You served for 13 months, at which time your company was acquired by another company and your position was abolished.
Week 1 Activity – High Growth Thinking Exercise
Unlimited Attempts Allowed
Available after 1 Oct 2023 0:00Available after 1 Oct 2023 0:00
Under every topic we cover in this course, we will be looking for the incentive that drives decisions.
For this week’s HGTE, view the short clip from the Live Lesson video and read the short excerpt from Luke Froeb.
Managerial Economics: A Problem-Solving Approach, by Luke Froeb et al.
Dr. Froeb absolutely agrees with Jon. “Problem-solving proceeds in two steps. First, reduce a problem to a bad decision, and then figure out who made it and why. Second, figure out how to ensure that the bad decision won’t be made again. Both steps require a model of how people behave. We use the “the rational actor” paradigm, which assumes that people act rationally, optimally, and in their self-interest. Under this paradigm, bad decisions are made for one of two reasons: (i) either decision-makers do not have enough information to make good decisions, or (ii) they lack the incentive to do so. Incentives have two pieces: a metric to measure how well an employee is performing, and a link from pay to performance.”
Answer the following question(s) in a 1 page (minimum) paper:
- Describe what economic incentives are, and identify at least 3 incentives you have experienced.
- Discuss how they influence businesses and entrepreneurs.
Format your work according to Strayer Writing Standards. The library is your home for SWS assistance, including citations and formatting. Please refer to the Library site for all support. Check with your professor for any additional instructions.