Question 1

The market demand for MP3 player is p = 50 - 0.5Q,and the marginal cost for a MP3 player is $10.If Nick receives 60% of the total profit,then

Accepted Answer

A)  Nick will produce 50 MP3 players. 
B)  Nick receives $500 as profit. 
C)  total profit is $800. 
D)  the efficiency in production is not achieved. 
A)  Nick will produce 50 MP3 players. 
B)  Nick receives $500 as profit. 
C)  total profit is $800. 
D)  the efficiency in production is not achieved.

Question 2

Piece rates are practical when

Accepted Answer

A)  individual output can be easily measured. 
B)  the quantity of the work is of much less importance than quality. 
C)  both employees and employers engage in opportunistic behavior. 
D)  All of the above. 
A)  individual output can be easily measured. 
B)  the quantity of the work is of much less importance than quality. 
C)  both employees and employers engage in opportunistic behavior. 
D)  All of the above.

Question 3

If an agent is risk neutral and a principal is risk averse,which of the following contracts would be efficient in risk bearing?

Accepted Answer

A)  A fixed fee is paid to the agent. 
B)  A fixed fee is paid to the principal. 
C)  An hourly rate is paid to the agent. 
D)  The agent enjoys a share of the profit. 
A)  A fixed fee is paid to the agent. 
B)  A fixed fee is paid to the principal. 
C)  An hourly rate is paid to the agent. 
D)  The agent enjoys a share of the profit.

Question 4

If the agent has more information than the principal and there is only one state of nature,then

Accepted Answer

A)  efficiency in both production and risk-bearing can be achieved. 
B)  only efficiency in production can be achieved. 
C)  only efficiency in risk-bearing can be achieved. 
D)  neither efficiency in production nor efficiency in risk-bearing can be achieved. 
A)  efficiency in both production and risk-bearing can be achieved. 
B)  only efficiency in production can be achieved. 
C)  only efficiency in risk-bearing can be achieved. 
D)  neither efficiency in production nor efficiency in risk-bearing can be achieved.

Question 5

For the following, please answer "True" or "False" and explain why.
-The type of contract selected depends on the information available to the parties.

Accepted Answer

A) True 
 B)False

Question 6

In the presence of asymmetric information,

Accepted Answer

A)  all contracts are efficient. 
B)  efficiency in risk bearing cannot be achieved. 
C)  a trade-off exists between risk-bearing efficiency and production efficiency. 
D)  no contracting will take place. 
A)  all contracts are efficient. 
B)  efficiency in risk bearing cannot be achieved. 
C)  a trade-off exists between risk-bearing efficiency and production efficiency. 
D)  no contracting will take place.

Question 7

Sarah's demand for routine medical visits is q = 10 - 0.2p when she is healthy and q = 20 - 0.2p when she is sick.Medical visits cost $50 each if Sarah has no medical insurance.She is sick 20% of the time.Sarah is considering two different insurance plans.One offers free medical visits; the other plan costs less up front but requires that Sarah pay $5 per medical visit.Compare the two plans in terms of the trade-off between risk and moral hazard.

Accepted Answer

At $50 per visit,Sarah makes no visits w

Question 8

Moral hazard occurs when contracts are written in such a way that

Accepted Answer

A)  the interests of agent and principal converge. 
B)  the interests of agent and principal diverge. 
C)  agents will wish to maximize the principal's utility. 
D)  production and risk-bearing efficiency are achieved. 
A)  the interests of agent and principal converge. 
B)  the interests of agent and principal diverge. 
C)  agents will wish to maximize the principal's utility. 
D)  production and risk-bearing efficiency are achieved.

Question 9

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

Accepted Answer

A)  production efficiency is not 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 not 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.

Question 10

Which of the following is NOT a difficulty with using a piece-rate contract?

Accepted Answer

A)  measuring output 
B)  eliciting the desired behavior 
C)  gaining worker acceptance 
D)  workers taking too much time to achieve a certain task 
A)  measuring output 
B)  eliciting the desired behavior 
C)  gaining worker acceptance 
D)  workers taking too much time to achieve a certain task

Question 11

To reduce moral hazard,a firm may

Accepted Answer

A)  pay workers at a piece rate. 
B)  offer a year-end bonus if firm profits are up. 
C)  offer stock options. 
D)  All of the above. 
A)  pay workers at a piece rate. 
B)  offer a year-end bonus if firm profits are up. 
C)  offer stock options. 
D)  All of the above.

Question 12

Explain why a firm may hire managers to operate outlets near the firm's headquarters,but may sell franchise rights for the outlets located greater distances from the headquarters.(With a franchise,the firm sells a brand name and a method of doing business to someone who then owns and operates the outlet.)

Accepted Answer

To avoid moral hazard problems,the firm

Question 13

Sue offers to pay Al $50 for each painting of his that she sells in her gallery.Each painting sells for $75.The cost to Al of producing each painting is $55.Which of the following statements is true about this contract?

Accepted Answer

A)  This contract is efficient. 
B)  This contract maximizes joint profit. 
C)  Al will not participate in this contract. 
D)  This is a fixed-fee contract. 
A)  This contract is efficient. 
B)  This contract maximizes joint profit. 
C)  Al will not participate in this contract. 
D)  This is a fixed-fee contract.

Question 14

If the principal has full information,production efficiency without supervision can occur with

Accepted Answer

A)  a fixed-fee rental contract. 
B)  a profit-sharing contract. 
C)  an incentive-compatible contract. 
D)  All of the above. 
A)  a fixed-fee rental contract. 
B)  a profit-sharing contract. 
C)  an incentive-compatible contract. 
D)  All of the above.

Question 15

For the following, please answer "True" or "False" and explain why.
-In the presence of asymmetric information,production efficiency is assured when the principal and agent share the profit.

Accepted Answer

A) True 
 B)False

Question 16

For the following, please answer "True" or "False" and explain why.
-A trade-off typically exists between incurring a moral hazard and making an adverse selection.

Accepted Answer

A) True 
 B)False

Question 17

Amy received her wage based on her working hours in the grocery store.The work contract she signed is an example of a

Accepted Answer

A)  fixed-fee contract. 
B)  hire contract. 
C)  contingent contract. 
D)  sharing contract. 
A)  fixed-fee contract. 
B)  hire contract. 
C)  contingent contract. 
D)  sharing contract.

Question 18

For the following, please answer "True" or "False" and explain why.
-In the presence of asymmetric information with costless monitoring and enforcement,a hire contract results in production efficiency.

Accepted Answer

A) True 
 B)False

Question 19

For the following, please answer "True" or "False" and explain why.
-With full information,any contract will lead to production efficiency.

Accepted Answer

A) True 
 B)False

The market demand for MP3 player is p = 50 - 0.5Q,and the marginal cost for a MP3 player is $10.If Nick receives 60% of the total profit,then

Piece rates are practical when

If an agent is risk neutral and a principal is risk averse,which of the following contracts would be efficient in risk bearing?

If the agent has more information than the principal and there is only one state of nature,then

For the following, please answer "True" or "False" and explain why. -The type of contract selected depends on the information available to the parties.

In the presence of asymmetric information,

Moral hazard occurs when contracts are written in such a way that

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

Which of the following is NOT a difficulty with using a piece-rate contract?

To reduce moral hazard,a firm may

Sue offers to pay Al $50 for each painting of his that she sells in her gallery.Each painting sells for $75.The cost to Al of producing each painting is $55.Which of the following statements is true about this contract?

If the principal has full information,production efficiency without supervision can occur with

For the following, please answer "True" or "False" and explain why. -In the presence of asymmetric information,production efficiency is assured when the principal and agent share the profit.

For the following, please answer "True" or "False" and explain why. -A trade-off typically exists between incurring a moral hazard and making an adverse selection.

Amy received her wage based on her working hours in the grocery store.The work contract she signed is an example of a

For the following, please answer "True" or "False" and explain why. -In the presence of asymmetric information with costless monitoring and enforcement,a hire contract results in production efficiency.

For the following, please answer "True" or "False" and explain why. -With full information,any contract will lead to production efficiency.

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 market demand for MP3 player is p = 50 - 0.5Q,and the marginal cost for a MP3 player is $10.If Nick receives 60% of the total profit,then

Piece rates are practical when

If an agent is risk neutral and a principal is risk averse,which of the following contracts would be efficient in risk bearing?

If the agent has more information than the principal and there is only one state of nature,then

For the following, please answer "True" or "False" and explain why. -The type of contract selected depends on the information available to the parties.

In the presence of asymmetric information,

Moral hazard occurs when contracts are written in such a way that

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

Which of the following is NOT a difficulty with using a piece-rate contract?

To reduce moral hazard,a firm may

Sue offers to pay Al $50 for each painting of his that she sells in her gallery.Each painting sells for $75.The cost to Al of producing each painting is $55.Which of the following statements is true about this contract?

If the principal has full information,production efficiency without supervision can occur with

For the following, please answer "True" or "False" and explain why. -In the presence of asymmetric information,production efficiency is assured when the principal and agent share the profit.

For the following, please answer "True" or "False" and explain why. -A trade-off typically exists between incurring a moral hazard and making an adverse selection.

Amy received her wage based on her working hours in the grocery store.The work contract she signed is an example of a

For the following, please answer "True" or "False" and explain why. -In the presence of asymmetric information with costless monitoring and enforcement,a hire contract results in production efficiency.

For the following, please answer "True" or "False" and explain why. -With full information,any contract will lead to production efficiency.

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