Question 1

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. B

Question 2

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. B

Question 3

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. B

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

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 6

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 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

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

Accepted Answer

A) requiring employees to post a bond 
B) offering a bonus after five years of service 
C) paying more than the market wage 
D) paying less than the market wage 
A) requiring employees to post a bond 
B) offering a bonus after five years of service 
C) paying more than the market wage 
D) paying less than the market wage

Question 9

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 10

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 11

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 12

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 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?

Accepted Answer

A) between $0 and $20,000 
B) between $20,000 and $200,000 
C) greater than $200,000 
D) zero 
A) between $0 and $20,000 
B) between $20,000 and $200,000 
C) greater than $200,000 
D) zero

Question 13

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 14

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 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

Suppose the probability of an employee being caught shirking,q,is a function of the employer's monitoring,M,such that q = M/100.If workers must put up a $1,000 bond and the gain to each worker from shirking is $100,what is the employer's optimal level of monitoring that is just sufficient to discourage shirking?

Accepted Answer

Workers are deterred from shir

Question 17

The type of contract selected depends on the information available to the parties.

Accepted Answer

A) True 
 B)False

Question 18

Suppose a plaintiff hires a lawyer to represent her in a court case.To which of the following contracts would a highly risk-averse plaintiff agree?

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 19

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 20

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.

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

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

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

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

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

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

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

In the presence of asymmetric information,

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

Production efficiency implies that

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.

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

The type of contract selected depends on the information available to the parties.

Suppose a plaintiff hires a lawyer to represent her in a court case.To which of the following contracts would a highly risk-averse plaintiff agree?

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

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

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

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

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

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

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

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

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

In the presence of asymmetric information,

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

Production efficiency implies that

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.

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

The type of contract selected depends on the information available to the parties.

Suppose a plaintiff hires a lawyer to represent her in a court case.To which of the following contracts would a highly risk-averse plaintiff agree?

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

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

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