Question 1

With full information any contract will lead to production efficiency.

Accepted Answer

A) True 
 B)False  False

Question 2

Explain why checks on principals might be necessary.

Accepted Answer

Without checks,the employer (principal)might have the ability of exploiting an employee (agent)by claiming that he/she did not put forth the effort agreed upon,or by falsely reporting information such as profits.Since payments are made after work is completed it potentially puts the employee in a bad bargaining position.An inefficient contract might eliminate/mitigate such behavior.

Question 3

Workers can reduce the chance of an employer lying by

Accepted Answer

A)  obtaining more information about the firm's performance. 
B)  having a representative on the board of directors. 
C)  requiring that employers share the cost of an economic downtown. 
D)  All of the above. 
A)  obtaining more information about the firm's performance. 
B)  having a representative on the board of directors. 
C)  requiring that employers share the cost of an economic downtown. 
D)  All of the above. D

Question 4

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 5

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 6

Assume a firm is run as a zero-profit enterprise.Which of the following would be true?

Accepted Answer

A)  There is a higher probability that wage reductions would outweigh layoffs. 
B)  Those in charge would not act any different than regular owners, there would still be layoffs. 
C)  Those not in charge would remain risk neutral. 
D)  Wage reductions would be lower than they would be if the firm was run for profit. 
A)  There is a higher probability that wage reductions would outweigh layoffs. 
B)  Those in charge would not act any different than regular owners, there would still be layoffs. 
C)  Those not in charge would remain risk neutral. 
D)  Wage reductions would be lower than they would be if the firm was run for profit.

Question 7

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 8

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 9

In which of the following contracts is the agent's payment unaffected by his performance?

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 10

Suppose the principal offers to share a percentage of the profit with the agent.Such a contract

Accepted Answer

A)  will yield the same income for the agent as a hire contract would. 
B)  is incentive compatible. 
C)  creates a production inefficiency. 
D)  would not be acceptable to any agent. 
A)  will yield the same income for the agent as a hire contract would. 
B)  is incentive compatible. 
C)  creates a production inefficiency. 
D)  would not be acceptable to any agent.

Question 11

Under which one of the following conditions would a lawyer accept a case on a contingent basis?

Accepted Answer

A)  The lawyer is risk averse. 
B)  The client is risk loving. 
C)  The lawyer has several cases on a contingent basis with payoffs that are not perfectly positively correlated. 
D)  The lawyer is more risk averse than the client is. 
A)  The lawyer is risk averse. 
B)  The client is risk loving. 
C)  The lawyer has several cases on a contingent basis with payoffs that are not perfectly positively correlated. 
D)  The lawyer is more risk averse than the client is.

Question 12

What is one potential problem with nationalized health care?

Accepted Answer

A)  It might not be efficient in risk bearing. 
B)  It is guaranteed to solve the principal-agent problem. 
C)  It would be efficient in risk bearing. 
D)  It might cost too much. 
A)  It might not be efficient in risk bearing. 
B)  It is guaranteed to solve the principal-agent problem. 
C)  It would be efficient in risk bearing. 
D)  It might cost too much.

Question 13

Author A accepts a $5,000 advance and a 10% royalty after 5,000 books are sold.Author B foregoes the advance and negotiates for a 15% royalty on all books sold.Author C decides to self publish his book and keep 50% of all sales revenue.Which of these authors is most likely to have 10 books published?

Accepted Answer

A)  Author A 
B)  Author B 
C)  Author C 
D)  They are all equally likely. 
A)  Author A 
B)  Author B 
C)  Author C 
D)  They are all equally likely.

Question 14

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.

Question 15

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 16

What is one potential problem with offering a choice of contracts to two different employees?

Accepted Answer

A)  If Employee A is paid more than Employee B, Employee A might sue for discrimination. 
B)  Employee A might be paid less than Employee B, proving statistical discrimination. 
C)  The two employees might compare salaries without comparing risk-preferences, thereby running the risk of jealousy or claims of discrimination. 
D)  The two employees might compare risk preferences without comparing salaries, thereby running the risk of jealousy or claims of discrimination. 
A)  If Employee A is paid more than Employee B, Employee A might sue for discrimination. 
B)  Employee A might be paid less than Employee B, proving statistical discrimination. 
C)  The two employees might compare salaries without comparing risk-preferences, thereby running the risk of jealousy or claims of discrimination. 
D)  The two employees might compare risk preferences without comparing salaries, thereby running the risk of jealousy or claims of discrimination.

Question 17

A contingent contract can create production inefficiency; however,many principals accept this because

Accepted Answer

A)  inefficiency is inevitable. 
B)  monitoring is costless. 
C)  risk is reduced. 
D)  profit will increase as a result. 
A)  inefficiency is inevitable. 
B)  monitoring is costless. 
C)  risk is reduced. 
D)  profit will increase as a result.

Question 18

Author A accepts a $5,000 advance and a 10% royalty after 5,000 books are sold.Author B foregoes the advance and negotiates for a 15% royalty on all books sold.Author C decides to self publish his book and keep 50% of all sales revenue.Which of these authors expects to sell the fewest books?

Accepted Answer

A)  Author A 
B)  Author B 
C)  Author C 
D)  They are all equally likely. 
A)  Author A 
B)  Author B 
C)  Author C 
D)  They are all equally likely.

Question 19

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 20

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

With full information any contract will lead to production efficiency.

Explain why checks on principals might be necessary.

Workers can reduce the chance of an employer lying by

Production efficiency implies that

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

Assume a firm is run as a zero-profit enterprise.Which of the following would be true?

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

In which of the following contracts is the agent's payment unaffected by his performance?

Suppose the principal offers to share a percentage of the profit with the agent.Such a contract

Under which one of the following conditions would a lawyer accept a case on a contingent basis?

What is one potential problem with nationalized health care?

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

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

What is one potential problem with offering a choice of contracts to two different employees?

A contingent contract can create production inefficiency; however,many principals accept this because

Author A accepts a $5,000 advance and a 10% royalty after 5,000 books are sold.Author B foregoes the advance and negotiates for a 15% royalty on all books sold.Author C decides to self publish his book and keep 50% of all sales revenue.Which of these authors expects to sell the fewest books?

In the presence of asymmetric information,

Introduction

Supply and Demand

Applying the Supply and Demand Model

Consumer Choice

Applying Consumer Theory

Firms and Production

Costs

Competitive Firms and Markets

Applying the Competitive Model

General Equilibrium and Economic Welfare

Monopoly

Pricing and Advertising

Oligopoly and Monopolistic Competition

Game Theory

Factor Markets

Interest Rates, Investments, and Capital Markets

Uncertainty

Externalities, Open-Access, and Public Goods

Asymmetric Information

Filters

Exam 20: Contracts and Moral Hazards

With full information any contract will lead to production efficiency.

Explain why checks on principals might be necessary.

Workers can reduce the chance of an employer lying by

Production efficiency implies that

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

Assume a firm is run as a zero-profit enterprise.Which of the following would be true?

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

In which of the following contracts is the agent's payment unaffected by his performance?

Suppose the principal offers to share a percentage of the profit with the agent.Such a contract

Under which one of the following conditions would a lawyer accept a case on a contingent basis?

What is one potential problem with nationalized health care?

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

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

What is one potential problem with offering a choice of contracts to two different employees?

A contingent contract can create production inefficiency; however,many principals accept this because

Author A accepts a $5,000 advance and a 10% royalty after 5,000 books are sold.Author B foregoes the advance and negotiates for a 15% royalty on all books sold.Author C decides to self publish his book and keep 50% of all sales revenue.Which of these authors expects to sell the fewest books?

In the presence of asymmetric information,

Introduction

Supply and Demand

Applying the Supply and Demand Model

Consumer Choice

Applying Consumer Theory

Firms and Production

Costs

Competitive Firms and Markets

Applying the Competitive Model

General Equilibrium and Economic Welfare

Monopoly

Pricing and Advertising

Oligopoly and Monopolistic Competition

Game Theory

Factor Markets

Interest Rates, Investments, and Capital Markets

Uncertainty

Externalities, Open-Access, and Public Goods

Asymmetric Information

Filters