Download presentation

Presentation is loading. Please wait.

Published byTori Jarmin Modified over 2 years ago

1
Lectures in Microeconomics-Charles W. Upton The Keith-Leffler Model

2
The Problem Suppose it costs $10 to make a high quality product. Competition will force the price to $10. Hence –If you can make a low quality product for $5 and pass if off you can make money until caught. –But there is no reward for making a high quality product.

3
The Keith-Leffler Model Assumptions Two levels of quality, q high and q min.

4
The Keith-Leffler Model Assumptions Two levels of quality, q high and q min. Higher quality products cost more to produce. The cost function is C(X,q high ) or C(X,q min ).

5
The Keith-Leffler Model More Assumptions The public cannot tell in advance whether a firm produces a high quality or a low quality product, but can after a year.

6
The Keith-Leffler Model More Assumptions The public cannot tell in advance whether a firm produces a high quality or a low quality product, but can after a year. Consumers know - don’t ask how - the minimum cost of producing both q high and q min.

7
The Keith-Leffler Model Produce High or Low Quality? AC(X,q min ) MC(X,q min )

8
The Keith-Leffler Model Produce High or Low Quality? AC(X,q min ) AC(X,q high ) MC(X,q min ) MC(X,q high )

9
The Keith-Leffler Model Three Strategies Be honest. Produce a low quality product and sell it at the low price. Be honest. Produce a high quality product and sell it at the high price.

10
The Keith-Leffler Model Three Strategies Be honest. Produce a low quality product and sell it at the low price. Be honest. Produce a high quality product and sell it at the high price. Cheat. Produce a low quality product, label it a high quality product and sell for a year at the high price.

11
The Keith-Leffler Model Profits Be honest. Produce a low quality product and sell it at the low price. = 0 Be honest. Produce a high quality product and sell it a the high price. = 0 Cheat. Produce a low quality product, label it a high quality product and sell for a year at the high price. Let’s see

12
The Keith-Leffler Model Produce High or Low Quality? AC(X,q min ) AC(X,q high ) MC(X,q min ) MC(X,q high )

13
The Keith-Leffler Model Produce High or Low Quality? P P

14
The Keith-Leffler Model Produce High or Low Quality? Optimal production for low quality product P P

15
The Keith-Leffler Model Produce High or Low Quality? Optimal production for low quality product ππ

16
The Keith-Leffler Model Produce High or Low Quality? Extra production due to spurious higher price ππ

17
The Keith-Leffler Model Produce High or Low Quality? Extra production due to spurious higher price π1π1 π 2

18
The Keith-Leffler Model Produce High or Low Quality? π1π1 π2π2 Honesty =0 Cheating =( π 1 + π 2 )/(1+r)

19
The Keith-Leffler Model Produce High or Low Quality? π1π1 π2π2 Honesty may be its own reward but not here

20
The Keith-Leffler Model The Incentive for Honesty π1π1 π2π2 Now suppose there is a premium for honesty P*

21
The Keith-Leffler Model The Incentive for Honesty π1π1 π2π2 The honest firm produces here P*

22
The Keith-Leffler Model The Incentive for Honesty Its profit is the area A P* A

23
The Keith-Leffler Model The Dishonest Firm Does More P*

24
The Keith-Leffler Model Its Profits P* A B D C

25
The Keith-Leffler Model Its Profits P* A B D C B+C Profits from cheating

26
The Keith-Leffler Model Its Profits P* A B D C A Profits from the premium for honesty

27
The Keith-Leffler Model Its Profits P* A B D C D Profits form cheating on the premium for honesty

28
The Keith-Leffler Model The Difference P* A B D C The Cheat earns A +B+C+D once

29
The Keith-Leffler Model The Difference P* A B D C The Cheat earns A +B+C+D once The Honest Firm earns A again and again

30
The Keith-Leffler Model To Cheat or Not to Cheat P* A B D C The Cheat earns A +B+C+D once The Honest Firm earns A again and again

31
The Keith-Leffler Model End ©2004 Charles W. Upton

Similar presentations

Presentation is loading. Please wait....

OK

Lectures in Microeconomics-Charles W. Upton Duopoly.

Lectures in Microeconomics-Charles W. Upton Duopoly.

© 2017 SlidePlayer.com Inc.

All rights reserved.

Ads by Google

Ppt on water pollution Ppt on earth damn Free download ppt on sources of energy for class 10 Ppt on water softening techniques to improve Download ppt on transportation in plants and animals Ppt on market friendly states Ppt on programmable logic device Ppt on zener diode operation Ppt on product advertising pitch Ppt on wireless network technologies