Microsoft Word - Jan_24.docx Problem 1 - Always Round Tire hires Plain Truth Advertising to write copy for its newspaper advertisements.

Microsoft Word - Jan_24.docx

Problem 1 – Always Round Tire hires Plain Truth Advertising to write copy for its newspaper advertisements. Always Round has a demand for advertising of MB = 400 -2S where S is the number of hours that Plain Truth delivers, and Plain Truth has a fixed supply cost: MC = $150 per hour. Assuming that there is no agency problem, how many hours should Always Round purchase from Plain Truth?

Part A – Assuming that there is no agency problem, what’s the total surplus?

Part B – Now, if the copy writers are slackers and only deliver 100 hours of work each week after each company spends $1,250 in monitoring or bonding costs, what is the total cost of this agency problem after monitoring and bonding?