Question 1

Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will be paid a fixed fee.Under this contract,

Accepted Answer

A)  production efficiency is achieved. 
B)  the client bears all of the risk. 
C)  the lawyer has an incentive to lie about his hours worked. 
D)  All of the above. 
A)  production efficiency is achieved. 
B)  the client bears all of the risk. 
C)  the lawyer has an incentive to lie about his hours worked. 
D)  All of the above. B

Question 2

An efficiency-wage premium serves the same function as a bond because,just as with a bond,the premium represents

Accepted Answer

A)  the amount the employee loses if caught shirking. 
B)  the expected value of the amount the employee loses if he shirks. 
C)  the cost of monitoring the employee. 
D)  the gain to the employee if he shirks. 
A)  the amount the employee loses if caught shirking. 
B)  the expected value of the amount the employee loses if he shirks. 
C)  the cost of monitoring the employee. 
D)  the gain to the employee if he shirks. A

Question 3

If a firm has established monitoring devices that have a 50% chance of detecting shirking,and an employee gains $5,000 from shirking,the employer can deter shirking by having employees post a bond equal to

Accepted Answer

A)  $2,500. 
B)  $5,000. 
C)  $10,000. 
D)  $50,000. 
A)  $2,500. 
B)  $5,000. 
C)  $10,000. 
D)  $50,000. C

Question 4

For the following, please answer "True" or "False" and explain why.
-When the production of a worker is relatively easily observable,the firm can pay a piece-rate.

Accepted Answer

A) True 
 B)False

Question 5

If an additional dollar spent on monitoring would reduce shirking by 10 minutes,then the firm will increase the worker's wage by $1 if this caused

Accepted Answer

A)  shirking to increase by less than 10 minutes. 
B)  shirking to decrease by more than 10 minutes. 
C)  shirking to decrease by less than 10 minutes. 
D)  monitoring to become unnecessary. 
A)  shirking to increase by less than 10 minutes. 
B)  shirking to decrease by more than 10 minutes. 
C)  shirking to decrease by less than 10 minutes. 
D)  monitoring to become unnecessary.

Question 6

If all firms pay an efficiency wage,then

Accepted Answer

A)  there is no cost to shirking because the shirking worker can receive his high wage at another firm after being caught and fired. 
B)  the macroeconomy would enjoy a prolonged period of near-zero unemployment. 
C)  there is a cost to shirking because the efficiency wage is less than it would have been if only a few firms paid it. 
D)  there is a cost to shirking because the shirking worker will spend a greater time unemployed after being caught and fired. 
A)  there is no cost to shirking because the shirking worker can receive his high wage at another firm after being caught and fired. 
B)  the macroeconomy would enjoy a prolonged period of near-zero unemployment. 
C)  there is a cost to shirking because the efficiency wage is less than it would have been if only a few firms paid it. 
D)  there is a cost to shirking because the shirking worker will spend a greater time unemployed after being caught and fired.

Question 7

As the probability of detecting shirking increases,the size of the bond necessary to deter shirking

Accepted Answer

A)  also increases. 
B)  stays the same. 
C)  decreases. 
D)  increases at an exponential rate. 
A)  also increases. 
B)  stays the same. 
C)  decreases. 
D)  increases at an exponential rate.

Question 8

Sam hires an attorney to present a court case.If Sam wins the case,he will receive some money.This payoff is a function of the attorney's hours and which judge is assigned the case that day.Judge A is very understanding toward people in Sam's position,but judge B is very harsh toward people like Sam.Is it possible for Sam to get the attorney to deliver the optimal amount of effort and make the attorney bear all of the risk?

Accepted Answer

Yes.If Sam accepts a fixed payment from

Question 9

In a store that sells souvenirs,suppose an agent receives a $1 commission for each unit sold,and the principal receives the residual profit.As a result,

Accepted Answer

A)  joint profit is maximized. 
B)  the agent will sell until the principal's marginal cost equals $1. 
C)  no agent would enter into such a contract. 
D)  the agent wishes to sell as many units as he can. 
A)  joint profit is maximized. 
B)  the agent will sell until the principal's marginal cost equals $1. 
C)  no agent would enter into such a contract. 
D)  the agent wishes to sell as many units as he can.

Question 10

If information is asymmetric,explain why the hire contract is not efficient in production and a moral hazard exists,but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem.

Accepted Answer

With the hire contract,the agent has no

Question 11

Efficiency in risk bearing implies that

Accepted Answer

A)  risk is completely eliminated. 
B)  the least risk-averse party bears most of the risk. 
C)  the most risk-averse party bears most of the risk. 
D)  all of the risk is borne by just one of the parties, regardless of the degree of risk aversion. 
A)  risk is completely eliminated. 
B)  the least risk-averse party bears most of the risk. 
C)  the most risk-averse party bears most of the risk. 
D)  all of the risk is borne by just one of the parties, regardless of the degree of risk aversion.

Question 12

A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until

Accepted Answer

A)  the worker requires no monitoring. 
B)  the worker receives the market wage and requires full-time monitoring. 
C)  the cost of monitoring the worker equals the efficiency wage. 
D)  the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one. 
A)  the worker requires no monitoring. 
B)  the worker receives the market wage and requires full-time monitoring. 
C)  the cost of monitoring the worker equals the efficiency wage. 
D)  the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one.

Question 13

The benefit to employers of deferred-payments is that

Accepted Answer

A)  adverse selection is eliminated. 
B)  employers cannot engage in any opportunistic behavior. 
C)  these payments raise the cost of being fired, so more monitoring is needed. 
D)  these payments raise the cost of being fired, so less monitoring is needed. 
A)  adverse selection is eliminated. 
B)  employers cannot engage in any opportunistic behavior. 
C)  these payments raise the cost of being fired, so more monitoring is needed. 
D)  these payments raise the cost of being fired, so less monitoring is needed.

Question 14

If good salespeople are extremely risk averse,then a choice between a fixed-fee contract and a contingent contract

Accepted Answer

A)  avoids a moral hazard. 
B)  will result in all job candidates choosing the contingent contract. 
C)  will result in an efficient contract. 
D)  may not be a good screening device. 
A)  avoids a moral hazard. 
B)  will result in all job candidates choosing the contingent contract. 
C)  will result in an efficient contract. 
D)  may not be a good screening device.

Question 15

Jacko's rock band is putting out a new CD with its music label.The contract between the band and the label specifies that the band receive 25% of the gross revenues plus another $10,000 up front.The record label projects the demand for the album
p = 50 - 0.003Q
where p is the price per CD (in $)and Q is the number of CDs demanded.The cost (not including the band's salary)of producing the CD is constant at $5 per disc.
a.Compute the joint-profit-maximizing price and quantity.
b.Compute the profit maximizing price that the label will wish to set.
c.What price will Jacko want his band's CD sold for (assume he only cares about money earned from the CDs).

Accepted Answer

a.The joint profit function is:
Π = (50-

Question 16

The market demand for MP3 player is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $12.If he receives 60% of the MP3 sales revenue,then

Accepted Answer

A)  Nick will sell 38 MP3 players. 
B)  Nick will sell 50 MP3 players. 
C)  Nick will receive $270 as profit. 
D)  Total profit is $342. 
A)  Nick will sell 38 MP3 players. 
B)  Nick will sell 50 MP3 players. 
C)  Nick will receive $270 as profit. 
D)  Total profit is $342.

Question 17

Describe the characteristics of an efficient contract between a principal and an agent.

Accepted Answer

An efficient contract is efficient in pr

Question 18

Which of the following could prevent the opportunistic behavior of firms?

Accepted Answer

A)  efficient contracts 
B)  good reputation 
C)  revealing relevant information about firms 
D)  All of the above 
A)  efficient contracts 
B)  good reputation 
C)  revealing relevant information about firms 
D)  All of the above

Question 19

Rents for stores at shopping malls are usually tied to the profits of the store.Comment on how this arrangement affects the mall owner's income versus a fixed rent.

Accepted Answer

It is likely that such an arrangement re

Question 20

Under which one of the following contracts does an agent have the least incentive to behave opportunistically?

Accepted Answer

A)  The agent pays a fixed fee to the principal for the right to all future payoffs. 
B)  The agent works for the principal on an hourly basis. 
C)  The agent receives a share of the profit. 
D)  The agent works for the principal on a per unit basis. 
A)  The agent pays a fixed fee to the principal for the right to all future payoffs. 
B)  The agent works for the principal on an hourly basis. 
C)  The agent receives a share of the profit. 
D)  The agent works for the principal on a per unit basis.

Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will be paid a fixed fee.Under this contract,

An efficiency-wage premium serves the same function as a bond because,just as with a bond,the premium represents

If a firm has established monitoring devices that have a 50% chance of detecting shirking,and an employee gains $5,000 from shirking,the employer can deter shirking by having employees post a bond equal to

For the following, please answer "True" or "False" and explain why. -When the production of a worker is relatively easily observable,the firm can pay a piece-rate.

If an additional dollar spent on monitoring would reduce shirking by 10 minutes,then the firm will increase the worker's wage by $1 if this caused

If all firms pay an efficiency wage,then

As the probability of detecting shirking increases,the size of the bond necessary to deter shirking

In a store that sells souvenirs,suppose an agent receives a $1 commission for each unit sold,and the principal receives the residual profit.As a result,

If information is asymmetric,explain why the hire contract is not efficient in production and a moral hazard exists,but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem.

Efficiency in risk bearing implies that

A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until

The benefit to employers of deferred-payments is that

If good salespeople are extremely risk averse,then a choice between a fixed-fee contract and a contingent contract

The market demand for MP3 player is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $12.If he receives 60% of the MP3 sales revenue,then

Describe the characteristics of an efficient contract between a principal and an agent.

Which of the following could prevent the opportunistic behavior of firms?

Rents for stores at shopping malls are usually tied to the profits of the store.Comment on how this arrangement affects the mall owner's income versus a fixed rent.

Under which one of the following contracts does an agent have the least incentive to behave opportunistically?

Introduction

Supply and Demand

A Consumers Constrained Choice

Demand

Consumer Welfare and Policy Analysis

Firms and Production

Costs

Competitive Firms and Markets

Properties and Applications of the Competitive Model

General Equilibrium and Economic Welfare

Monopoly and Monopsony

Pricing and Advertising

Game Theory

Oligopoly and Monopolistic Competition

Factor Markets

Uncertainty

Property Rights, externalities, rivalry, and Exclusion

Asymmetric Information

Filters

Exam 19: Contracts and Moral Hazards

Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will be paid a fixed fee.Under this contract,

An efficiency-wage premium serves the same function as a bond because,just as with a bond,the premium represents

If a firm has established monitoring devices that have a 50% chance of detecting shirking,and an employee gains $5,000 from shirking,the employer can deter shirking by having employees post a bond equal to

For the following, please answer "True" or "False" and explain why. -When the production of a worker is relatively easily observable,the firm can pay a piece-rate.

If an additional dollar spent on monitoring would reduce shirking by 10 minutes,then the firm will increase the worker's wage by $1 if this caused

If all firms pay an efficiency wage,then

As the probability of detecting shirking increases,the size of the bond necessary to deter shirking

In a store that sells souvenirs,suppose an agent receives a $1 commission for each unit sold,and the principal receives the residual profit.As a result,

If information is asymmetric,explain why the hire contract is not efficient in production and a moral hazard exists,but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem.

Efficiency in risk bearing implies that

A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until

The benefit to employers of deferred-payments is that

If good salespeople are extremely risk averse,then a choice between a fixed-fee contract and a contingent contract

The market demand for MP3 player is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $12.If he receives 60% of the MP3 sales revenue,then

Describe the characteristics of an efficient contract between a principal and an agent.

Which of the following could prevent the opportunistic behavior of firms?

Rents for stores at shopping malls are usually tied to the profits of the store.Comment on how this arrangement affects the mall owner's income versus a fixed rent.

Under which one of the following contracts does an agent have the least incentive to behave opportunistically?

Introduction

Supply and Demand

A Consumers Constrained Choice

Demand

Consumer Welfare and Policy Analysis

Firms and Production

Costs

Competitive Firms and Markets

Properties and Applications of the Competitive Model

General Equilibrium and Economic Welfare

Monopoly and Monopsony

Pricing and Advertising

Game Theory

Oligopoly and Monopolistic Competition

Factor Markets

Uncertainty

Property Rights, externalities, rivalry, and Exclusion

Asymmetric Information

Filters