Directions for Experiment 4

There are six rounds in this experiment. To play each round of the experiment, you must pay \$20. You are required to make this payment in advance of each round before you know anything about the round. If you play all six rounds and play well, you will earn more than enough to cover your \$20 fee per round and in total earn positive profits on the experiment. However, if you wish you can elect not to play the experiment at all. To do so, simply hand your sheet in to the experimentor (i.e., the instructor) before the first round of the experiment begins. If you do not hand in your sheet then you must pay \$20 up front in each round of the experiment regardless of the choices you subsequently make on each round of the experiment.

In each round of the experiment you must decide how many units of a hypothetical good you want to sell at the prevailing price for the good. To produce any given level of output of the good, you will have to purchase an amount of an input we shall call labor. You can sell 0, 1, 2, 3, 4, 5, 6, 7, 8, or 9 units of output of the hypothetical good. Table 1 itemizes the number of units of labor required to produce levels of output of the good between 0 and 9 units.

Table 1

 Level of Output Units of Labor Required 0 0 1 6 2 10 3 12 4 16 5 22 6 30 7 39 8 50 9 63

Each round of the experiment will be conducted as follows. First, the experimentor (i.e., the instructor) will tell you the price of labor and give you a minute or so to make any calculations you wish. Then the experimentor will call out a price for the produced good. You will have a few seconds to decide how many units of the good you want to sell at that price. Enter the amount you want to sell on the schedule below, which also provides a place for you to record the price of labor and the price of the good. Your objective is to maximize your earnings from the experiment. Your earnings on each round equal the total revenues from the number of units of output you produce in that round minus your total costs. Your revenues equal the price of the output times the number of units of output you produce. Your costs equal \$20, the cost of playing the round, plus the number of units of labor required to produce your output times the price of labor. Even if you do not sell any output in a round, you incur the \$20 up-front cost for playing the round.

In the first three rounds of the experiment, the price of labor will be the same but the price of the produced good will be varied. After round three a new price of labor will be assigned. Then three new prices for the good produced will be called out in rounds four, five, and six. In total, you will have to choose a level of output of the produced good six times. After the sixth round compute your earnings on each round of the experiment (your earnings for any given round may be negative) and then total your earnings from the six rounds. This is your earnings for the experiment. Enter this number at the bottom of the schedule. Make sure you enter your name and discussion section below.

Name Section

 Round Price of Labor Price of the Good No. of units sold of the Good Total Cost of Labor Entry Cost Total Revenues Total Profits 1. \$20 2. 20 3. 20 4. 20 5. 20 6. 20

Total earnings on the six rounds of the experiment