Reference no: EM131309580
Harry is dating Sally. Because he is devastated at the thought of being dumped, he spends considerable resources making himself attractive to her: expensive haircuts, ballroom dancing classes, a gym membership, and so on. Harry's marginal cost of making himself attractive to Sally is given by MC in the graph below. Sally, of course, appreciates his efforts: The marginal benefit Harry receives from his efforts (which account for the probability of being dumped) is shown as MB.
a. On the graph, determine the optimal amount of resources Harry should expend making himself more attractive to Sally.
b. Harry marries Sally. The marriage contract raises the cost of exiting a relationship, and thus, for any given level of Harry's expenditure, Sally is less likely to dump Harry. Illustrate the effects of the marriage contract in the accompanying graph by shifting the appropriate curve in the appropriate direction.
c. "Harry has really let himself go since we got married. He burps too much, seldom shaves, and never takes out the trash." Is this commonly heard statement consistent with the illustration you have drawn?
d. What kind of problem does this illustrate: adverse selection or moral hazard?
e. A "covenant marriage" is one that is virtually impossible to exit for a given period of time. Illustrate the effects of a covenant marriage on your graph, and comment on the predictions your graph holds for the quality of relationships fostered by covenant marriages.
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