12 May HOW HAS THEIR IMPORTANCE AND ATTRACTIVENESS CHANGED OVER TIME?
Econ 106I Spring 2017Practice Final ExamThis practice Ãnal is similar in scope to the Ãnal on June 10th. Both consist of a handful ofquestions regarding a mini case-study, and two unrelated quantitative questions. You willhave three hours for the Ãnal exam. The one substantial di§erence between this practiceÃnal and the real Ãnal is that the text of the case study in the Ãnal will be approximatelyhalf as long as the text of the case study considered here, so time will not be as tight in theÃnal exam.1. Bennett, Strang and Farris: Read the case study1 and answer the following questions:(a) What are the synergies between the di§erent practices of BSF, i.e. what makesthe whole more valuable that the sum of its parts? Are there dis-synergies? (8points)(b) What factors lead to the escalation of the conáict around partner compensationin 1982/83? (8 points)(c) How does the partner compensation scheme rely on objective factors such asseniority and performance (as measured by billable hours or origination credits fornew client business), and subjective assessment by the compensation committee?What are the advantages and disadvantages of these compensation factors? How has their importance and attractiveness changed over time? (25 points)(d) Has BSF made mistakes? What should BSF do in the current situation? (9points)2. Risk Averse Entrepreneur. You have programmed a new messaging app, whosevalue q + X depends on its quality q and its market potential X. Expected marketpotential is X = 1000 but there is uncertainty, with variance V ar(X) = V = 100.Since you are risk averse, with parameter r = 2, you would like to sell the app toa (risk neutral) tech giant. The quality q equals 0 or 400, but only you know therealization of q while the tech giant thinks both of these values of q equaly likely. (25points)(a) What are the values (i.e. certainty equivalents) of the messaging app to you andthe tech giant as a function of q? (recall that you are risk averse) (5 points)(b) At which prices would you be willing to sell the app if quality is high/low? (4points)(c) At which prices does the tech giant face adverse selection, i.e. you sell only ifquality is low? (2 points)1 available at http://cb.hbsp.harvard.edu/cbmp/access/644448921(d) For which prices is the tech giant willing to purchase the app? (Hint: While thetech giant cannot condition his choice on the quality q since he does not know q,he knows that the entrepreneur knows q, and the tech giant anticipates that theentrepreneurÃs willingness to sell the app depends on its quality) (6 points)(e) For which prices does a high/low quality get traded? (8 points)3. Paying your book-keeper: You hired a book-keeper for your start-up and worrythat he might channel money towards private purposes. SpeciÃcally, you Ãgure thathe might embezzle up to $10k. If he does so, you will notice with probabililty 50%;even if you notice, you will not be able to prove it in court, so all you can do is Ãrehim, but then he can still get another job at the going salary of $40k a year. Thus,you Ãgure that you need to pay the book-keeper an e¢ ciency wage above the goingsalary to keep him honest. (As in class, we are focusing on the problem of keeping thebook-keeper honest at the current time; that is, you do not need to worry whether thebook-keeper might embezzle money at a later time) (25 points)(a) If all goes well, both of you expect the employment to last another 4 years.How high of an e¢ ciency wage w do you need to pay him to prevent him fromembezzling money? (10 points)(b) The economy has become more turbulent and the expected length of the employmentrelationship has dropped by half to 2 years. How do you need to adjust thee¢ ciency wage? Explain. (5 points)(c) Book-keeping has become so complex, and embezzlement so hard to detect thatyou worry about false positives, i.e. you now think that even if the book-keeperis acting honestly, there is a 25% chance that you will Ãnd (erroeneously) thathe was cheating and Ãre him. How do you need to adjust the e¢ ciency wage?Explain. (10 points)2
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