Essay Question for MGEC58

You are to write an essay that is based upon the topics described below, using ONLY the material taught in lecture – DO NOT use outside sources to complete this essay (the material taught during the lectures is sufficient to answer all of the questions below). The essay is to be no more than 800 words in length, and must be double-spaced with one-inch margins. The essay will be due on Thursday, March 29 by 7:59pm, and is to be uploaded into Turnitin.com through the course website on Blackboard, as specified in the course syllabus. If you hand in your paper late, then the grade for your paper will be decreased by ten percentage points for each day that your work is late. For example, suppose that you hand in your work at 10:00 am on March 30 – in this case, you have handed in your paper in the day after the deadline, so your paper’s grade will be decreased by 10 percentage points (i.e. a grade of 85% would be decreased to 75% in that case). The grade on your paper will be based on the quality of your answer as well as the clarity with which you express yourself; grammar and spelling errors will be penalized. Please see the grading rubric for more details about this.

Essay question:

You are the manager of a company that owns several golf courses in different countries all over the world. You run one golf course yourself in Toronto, and employ a number of workers to run the other golf courses. You provide each of your employees with supplies for running the golf course (like grass seed, golf carts, and other things needed to maintain the course), and pay them according to the following formula:

Income = a + b(Golf Course Revenues) (1)

where “Golf Course Revenues” represents the total revenue (in dollars) a worker creates at a golf course in a given week; you will determine the value of the parameters “a” and “b”. Since you are running a golf course yourself, direct oversight of all your workers at the other courses is impossible, so their effort is not directly observable for you; however, you will be able to observe the revenues they generate at their own courses. Furthermore, a worker’s effort determines the amount of revenues generated by the course they run. Lastly, the courses are dedicated to preserving a natural setting, so no electronic devices (like cameras or cell phones) are permitted anywhere on their properties.

Your goal is to use this contract to encourage your workers to use the Socially Efficient level of effort; using the theories you’ve learned in class, you will need to discuss your contract’s ability to induce your workers to choose the Socially Efficient level of effort given the issues that are described on the following page.

1.

You are considering three types of contracts for your employees:

(i) (ii) (iii)

a = 0 and b = 0.75 a < 0 and b = 1
a < 0 and b = 2

Explain how the worker’s choice of effort will compare in the three cases, and discuss the relative values of the sum of profits and utility in the three cases.

2. Suppose that demand for golf on one of your company’s courses depends on various factors. Consider two such issues:

1. (i)  A course in Ireland reports that its demand for golf depends on how Irish golfer Rory McIlroy fares in a given week. If Rory places in the top ten in a given week’s PGA tournament, then golf’s popularity surges, and in that week, fifty extra rounds are played at the local golf course. However, if Rory does not place in the top ten in a given week’s PGA tournament, then golf’s popularity wanes, and in that week, fifty fewer rounds are played at the local golf course. In any given week, Rory has a 50% chance of placing in the top ten of a tournament.
2. (ii)  A course in France reports that a private social club can cause its demand for golf to change a lot. Each week, the social club meets to determine which athletic activity it will take up in a given week: tennis or golf. Half of the time, the club will choose tennis, and the other half of the time, it will choose golf. When the club members choose to play golf, an extra 60 rounds are played that week at the local golf course. But when the club members choose to play tennis, 60 fewer rounds are played that week at the local golf course. Furthermore, members of the club do not speak with non-members about any discussions conducted at the social club.

In both case (i) and case (ii), discuss the ability of your contract to elicit the Socially Efficient level of effort from your employees in Ireland and France.

3. Suppose a golf course in Vancouver has been running without any problems, and the worker who runs the course has been offered a contract that induces her to choose the Socially Efficient level of effort. But suppose that a change occurs at the course: once every 10 weeks, an organized gang who pose as golfers will rob the course so that it has no revenues that week. In this case, discuss circumstances under which a new contract: (i) could still elicit the Socially Efficient level of effort, and (ii) could no longer could elicit the Socially Efficient level of effort. Also, discuss how the values of (a, b) would compare in both (i) and (ii) before and after the gang started to rob the golf course.