April 28, 1997
This exam has three questions. The first two count 15 points apiece.
The third counts 20. 50 points, 50 minutes. Allocate your time
This examination ends at 10:50. You may work past 10:50, but at a
price of 2 points per minute. This rule will be strictly enforced.
If you have any questions please go out into the hall and ask me there.
Clear, concise, and correct answers are best. Think before you write.
1. State the Coase Theorem.
Why is it relevant for the study of organizations?
Provide a real world example in which one or more of the Coase Theorem's
assumptions is violated.
2. Professional athletes often contractually agree not to engage
in dangerous activities such as skydiving or skiing during the life of
Is it surprising that the athletes themselves may propose such a contractual
term, even though it places limits on their own behavior? Why or
3. Newspapers base advertising rates in part on circulation: the
number of copies that are sold or given away as promotions. This
is particularly the case when advertisers agree to purchase large quantities
of advertising over a significant period of time. One reason advertising
rates are based on circulation is that doing so provides newspapers incentives
to produce high quality products that people will buy and/or read.
Agreements between newspapers and advertisers can be interpreted as incentive
contracts; the rate advertisers pay per reader can be interpreted as a
sort of performance incentive.
Recently we have seen the emergence of on-line newspapers on the world
wide web, and advertisements have begun to appear on web pages. Unlike
print ads, readers can click on these advertisements to obtain further
information about the advertiser.
Discuss whether it would be efficient to base advertising rates not
just on the number of people that observe pages with advertisements, but
also on how many of them "click through" for further information.
Why would or it would not be efficient to do so?
[You are welcome to make any (reasonable) assumptions you need about things
not otherwise stated in the problem. Just state them clearly.]
Using the informativeness principle, are there any other pieces of
information that one might wish to incorporate into advertising rates for
web-based pages? What are they, and why would it be efficient to