Question 1

The outcome of the state of nature affects the payoff to the agent under a

Accepted Answer

A)  fixed-fee contract. 
B)  hire contract. 
C)  contingent contract. 
D)  All of the above. 
A)  fixed-fee contract. 
B)  hire contract. 
C)  contingent contract. 
D)  All of the above.

Question 2

Suppose two owners of a store agree to split the profit equally regardless of the number of hours each spends working at the store.As a result,

Accepted Answer

A)  production efficiency is achieved. 
B)  each enjoys only half the marginal benefit of an additional hour working in the store. 
C)  one will work all of the time while the other works zero hours. 
D)  each will work as many hours as if he or she were the sole owner. 
A)  production efficiency is achieved. 
B)  each enjoys only half the marginal benefit of an additional hour working in the store. 
C)  one will work all of the time while the other works zero hours. 
D)  each will work as many hours as if he or she were the sole owner.

Question 3

A good salesperson can sell $1,000,000 worth of goods,while a poor one can sell only $100,000 worth of goods.Job applicants know if they are good or bad,but the firm does not.A firm will offer job applicants a choice between a fixed salary of $25,000 or 20% commission.Assuming risk-neutral salespersons and the possibility of opportunistic behavior,will this choice of contracts allow the firm to distinguish between good salespersons and bad ones before the hiring decision is made?

Accepted Answer

Under commission,a good salesperson will

Question 4

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is production efficiency assured?

Accepted Answer

A)  The lawyer is paid by the hour. 
B)  The lawyer receives a share of the settlement. 
C)  The lawyer receives a fixed fee. 
D)  The lawyer pays the client a fee for the right to the entire settlement. 
A)  The lawyer is paid by the hour. 
B)  The lawyer receives a share of the settlement. 
C)  The lawyer receives a fixed fee. 
D)  The lawyer pays the client a fee for the right to the entire settlement.

Question 5

Which of the following workers is most likely to be asked to post a bond?

Accepted Answer

A)  construction contractor 
B)  fast food worker 
C)  sanitation worker 
D)  book author 
A)  construction contractor 
B)  fast food worker 
C)  sanitation worker 
D)  book author

Question 6

For the following, please answer "True" or "False" and explain why.
-Production inefficiency is more likely to occur when the principal has more information about work performance than the agent does.

Accepted Answer

A) True 
 B)False

Question 7

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $10.If he signed a fixed-fee rental contract with the store owner and pays $400 as the rent,

Accepted Answer

A)  Nick will sell 20 MP3 players. 
B)  Nick will sell 30 MP3 players. 
C)  Nick will sell 40 MP3 players. 
D)  Nick will sell 50 MP3 players. 
A)  Nick will sell 20 MP3 players. 
B)  Nick will sell 30 MP3 players. 
C)  Nick will sell 40 MP3 players. 
D)  Nick will sell 50 MP3 players.

Question 8

A good salesperson can sell $1,000,000 worth of goods,while a poor one can sell only $100,000 worth of goods.Job applicants know if they are good or bad,but the firm does not.A firm will offer job applicants a choice between a fixed salary or 20% commission.Assuming risk-neutral salespersons and no opportunistic behavior,what level must the fixed salary be so that the firm can distinguish a prospective good salesperson from a poor one,and thereby avoid hiring a poor one?

Accepted Answer

Under commission,a good salesperson will

Question 9

Suppose an agent must pay the full marginal cost for an item but splits the marginal revenue with the principal.As a result,

Accepted Answer

A)  joint profit is maximized. 
B)  joint profit is not maximized. 
C)  the agent will not enter into such a contract. 
D)  the agent wishes to sell as many items as he can. 
A)  joint profit is maximized. 
B)  joint profit is not maximized. 
C)  the agent will not enter into such a contract. 
D)  the agent wishes to sell as many items as he can.

Question 10

The moral hazard associated with managers whose productivity is difficult to quantify can be decreased with

Accepted Answer

A)  piece-rate contracts. 
B)  year-end bonuses. 
C)  decreased wages. 
D)  adverse selection. 
A)  piece-rate contracts. 
B)  year-end bonuses. 
C)  decreased wages. 
D)  adverse selection.

Question 11

Explain how more than one possible state of nature affects contract choices.

Accepted Answer

The uncertainty of the state o

Question 12

In the presence of asymmetric information,a piece-rate contract

Accepted Answer

A)  achieves production efficiency. 
B)  can lead to agents producing more output than would occur under a fixed-rent-paid-to-the-principal contract. 
C)  is impossible to write. 
D)  will result in the principal earning all of the profit. 
A)  achieves production efficiency. 
B)  can lead to agents producing more output than would occur under a fixed-rent-paid-to-the-principal contract. 
C)  is impossible to write. 
D)  will result in the principal earning all of the profit.

Question 13

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 $10.If he receives $12 for each MP3 player he sells from the store owner and the store owner controls the quantity of MP3's available for sale,then

Accepted Answer

A)  40 MP3 players will be sold. 
B)  joint profit is $798. 
C)  joint profit will be maximized. 
D)  Nick will sell as many as he can. 
A)  40 MP3 players will be sold. 
B)  joint profit is $798. 
C)  joint profit will be maximized. 
D)  Nick will sell as many as he can.

Question 14

Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  screening. 
D)  signaling. 
A)  adverse selection. 
B)  moral hazard. 
C)  screening. 
D)  signaling.

Question 15

In the presence of asymmetric information,a hire contract

Accepted Answer

A)  achieves production efficiency. 
B)  can lead to opportunistic behavior on the part of the agent. 
C)  is impossible to write. 
D)  will result in the principal earning all of the profit. 
A)  achieves production efficiency. 
B)  can lead to opportunistic behavior on the part of the agent. 
C)  is impossible to write. 
D)  will result in the principal earning all of the profit.

Question 16

In the presence of asymmetric information,a contingent contract

Accepted Answer

A)  achieves production efficiency. 
B)  can lead to opportunistic behavior on the part of the agent. 
C)  is impossible to write. 
D)  will result in the principal earning all of the profit. 
A)  achieves production efficiency. 
B)  can lead to opportunistic behavior on the part of the agent. 
C)  is impossible to write. 
D)  will result in the principal earning all of the profit.

Question 17

Production efficiency implies that

Accepted Answer

A)  joint profits are maximized. 
B)  joint profits are minimized. 
C)  joint profits are zero. 
D)  joint profits can be increased. 
A)  joint profits are maximized. 
B)  joint profits are minimized. 
C)  joint profits are zero. 
D)  joint profits can be increased.

Question 18

For the following, please answer "True" or "False" and explain why.
-When shirking at the workplace occurs,increased monitoring of workers is the only effective way to reduce this behavior.

Accepted Answer

A) True 
 B)False

Question 19

Suppose employees pay a bond of $1,000 to an employer.The gain from shirking is $400.Monitoring devices have been installed so that there is a 50% chance of being caught if you are shirking.The company is considering the installation of additional monitoring devices to increase the chance of catching a shirker to 100%.They feel this is needed to deter all shirking.What is your recommendation to the company? Explain.

Accepted Answer

Shirking is already deterred;

Question 20

One way to prevent workers from shirking is to

Accepted Answer

A)  hire only workers who are predisposed toward shirking. 
B)  hire only workers who are predisposed toward not shirking. 
C)  reduce monitoring to zero. 
D)  pay workers a fixed fee. 
A)  hire only workers who are predisposed toward shirking. 
B)  hire only workers who are predisposed toward not shirking. 
C)  reduce monitoring to zero. 
D)  pay workers a fixed fee.

The outcome of the state of nature affects the payoff to the agent under a

Suppose two owners of a store agree to split the profit equally regardless of the number of hours each spends working at the store.As a result,

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is production efficiency assured?

Which of the following workers is most likely to be asked to post a bond?

For the following, please answer "True" or "False" and explain why. -Production inefficiency is more likely to occur when the principal has more information about work performance than the agent does.

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $10.If he signed a fixed-fee rental contract with the store owner and pays $400 as the rent,

Suppose an agent must pay the full marginal cost for an item but splits the marginal revenue with the principal.As a result,

The moral hazard associated with managers whose productivity is difficult to quantify can be decreased with

Explain how more than one possible state of nature affects contract choices.

In the presence of asymmetric information,a piece-rate 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 $10.If he receives $12 for each MP3 player he sells from the store owner and the store owner controls the quantity of MP3's available for sale,then

Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid

In the presence of asymmetric information,a hire contract

In the presence of asymmetric information,a contingent contract

Production efficiency implies that

For the following, please answer "True" or "False" and explain why. -When shirking at the workplace occurs,increased monitoring of workers is the only effective way to reduce this behavior.

One way to prevent workers from shirking is to

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

The outcome of the state of nature affects the payoff to the agent under a

Suppose two owners of a store agree to split the profit equally regardless of the number of hours each spends working at the store.As a result,

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is production efficiency assured?

Which of the following workers is most likely to be asked to post a bond?

For the following, please answer "True" or "False" and explain why. -Production inefficiency is more likely to occur when the principal has more information about work performance than the agent does.

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $10.If he signed a fixed-fee rental contract with the store owner and pays $400 as the rent,

Suppose an agent must pay the full marginal cost for an item but splits the marginal revenue with the principal.As a result,

The moral hazard associated with managers whose productivity is difficult to quantify can be decreased with

Explain how more than one possible state of nature affects contract choices.

In the presence of asymmetric information,a piece-rate 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 $10.If he receives $12 for each MP3 player he sells from the store owner and the store owner controls the quantity of MP3's available for sale,then

Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid

In the presence of asymmetric information,a hire contract

In the presence of asymmetric information,a contingent contract

Production efficiency implies that

For the following, please answer "True" or "False" and explain why. -When shirking at the workplace occurs,increased monitoring of workers is the only effective way to reduce this behavior.

One way to prevent workers from shirking is to

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