3. Suppose that Tony has just bought some property on the Turkish side of Cyprus

Question

3. Suppose that Tony has just bought some property on the Turkish side of Cyprus. The value of the property is $500,000 in the absence of any ownership risk. Unfortunately, due to the 1974 invasion (or liberation if you are Turkish) of Cyprus much of the property was previously owned by Greek Cypriots who still claim ownership of the land. Thus, there is some probability that someday he will lose his property to the previous owner. However, Tony can reduce this probability by paying a variety of bribes to officials to get fake documentation of the land's title history. Assume that the probability that he retains his property is summarized in the following table: Bribe Probability 70% 10,000 80% 30,000 90% 50,000 95 100,000 100% A. What is the efficient level of bribes that Tony should engage in? B.What if the property was only worth $250,000 (assume the bribes are still the same? C. What if the property was worth $1.2 million? D. What if the probability were instead given by the following: p(b) TO 000 where b is the size of the bribe. What is the optimal bribe if the property is worth $500,000?

Explanation / Answer

A. Considering the efficiency as the net gain i.e.

net gain = expected Value of property Tony retains - Bribe money

so the table is:

Thus, we will bribe for 50000.

B. The gain table is:

Thus, 30000 bribe is efficient.

C. Again the net gain table:

Thus, bribe 100000 here.

[Excel formula]

D. Net gain :

here bribe of 30000 is efficient since it gives maximum gain.

Formula in excel:

Bribe Prob Property value for 500000 value of property remain Net Gain 0 70% 350000 350000 10000 80% 400000 390000 30000 90% 450000 420000 50000 95% 475000 425000 100000 100% 500000 400000

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