Exam 20: Contracts and Moral Hazards

In professional golf,a tournament winner might win,say,$1 million,whereas second place wins only $600,000.Why might golf have a 40% reduction in prize money from first and second place?

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

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?

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

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

In the presence of asymmetric information,production efficiency is assured when the principal and agent share the profit.

A trade-off typically exists between incurring a moral hazard and making an adverse selection.

In NASCAR,a race winner might win,say,$500,000,whereas second place wins $450,000.Why might NASCAR have a 10% reduction in prize money from first and second place?

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

A good salesperson can sell $100,000 worth of goods,while a poor one can sell only $10,000 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 $2,000 or a commission on the sale.Assume risk-neutral salespersons and no opportunistic behavior.Given that the firm wants to distinguish a prospective good salesperson from a poor one,what should be the commission on sales?

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

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.

Which of the following would not be used by firms to deter shirking?

Monitoring is often used by firms in an attempt to decrease

In the presence of asymmetric information with costless monitoring and enforcement,a hire contract results in production efficiency.

If a professional sports athlete signs a new contract which defers compensation until years after she is retired,she is signaling

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 and a 20% commission.Assuming risk-neutral salespersons and no opportunistic behavior,what level must the fixed salary be so that the firm can determine a prospective good salesperson from a poor one?

In 2008,foreclosures reached a record high.Which of the following is NOT a possible reason for foreclosures?

In the presence of asymmetric information,a hire contract

A good salesperson can sell $500,000 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 $10,000 or a 10% commission.Assuming risk-neutral salespersons and no opportunistic behavior,can the firm determine a prospective good salesperson from a poor one?