Question 1

Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will receive a share of the settlement if the plaintiff wins.Under this contract,

Accepted Answer

A) production efficiency cannot be achieved. 
B) the client bears all of the risk. 
C) the lawyer bears all of the risk. 
D) the risk is shared. 
A) production efficiency cannot be achieved. 
B) the client bears all of the risk. 
C) the lawyer bears all of the risk. 
D) the risk is shared.

Question 2

Alex is hired as a sales agent and receives 10% commission on the sales price.The contract he signed is 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 3

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

Accepted Answer

A) $2,500. 
B) $5,000. 
C) $10,000. 
D) $50,000. 
A) $2,500. 
B) $5,000. 
C) $10,000. 
D) $50,000.

Question 4

Under which one of the following contracts does an agent have the least incentive to behave opportunistically?

Accepted Answer

A) The agent pays a fixed fee to the principal for the right to all future payoffs. 
B) The agent works for the principal on an hourly basis. 
C) The agent receives a share of the profit. 
D) The agent works for the principal on a per unit basis. 
A) The agent pays a fixed fee to the principal for the right to all future payoffs. 
B) The agent works for the principal on an hourly basis. 
C) The agent receives a share of the profit. 
D) The agent works for the principal on a per unit basis.

Question 5

Describe the characteristics of an efficient contract between a principal and an agent.

Accepted Answer

An efficient contract is efficient in pr

Question 6

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

Accepted Answer

A) production efficiency is 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 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 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

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 9

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 10

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell an MP3 player is $12.If he receives 60% of the MP3 sales revenue,then

Accepted Answer

A) Nick will sell 38 MP3 players. 
B) Nick will sell 50 MP3 players. 
C) Nick will receive $270 as profit. 
D) total profit is $342. 
A) Nick will sell 38 MP3 players. 
B) Nick will sell 50 MP3 players. 
C) Nick will receive $270 as profit. 
D) total profit is $342.

Question 11

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 signed a fixed-fee rental contract with the store owner and pays $1000 as the rent,

Accepted Answer

A) Nick will sell 20 MP3 players. 
B) Nick will sell 40 MP3 players. 
C) Nick will sell 50 MP3 players. 
D) Nick will not sign the contract. 
A) Nick will sell 20 MP3 players. 
B) Nick will sell 40 MP3 players. 
C) Nick will sell 50 MP3 players. 
D) Nick will not sign the contract.

Question 12

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 13

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 14

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 15

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 16

Monitoring is often used by firms in an attempt to decrease

Accepted Answer

A) shirking. 
B) piece rates. 
C) adverse selection. 
D) signaling. 
A) shirking. 
B) piece rates. 
C) adverse selection. 
D) signaling.

Question 17

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 18

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 19

A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until

Accepted Answer

A) the worker requires no monitoring. 
B) the worker receives the market wage and requires full-time monitoring. 
C) the cost of monitoring the worker equals the efficiency wage. 
D) the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one. 
A) the worker requires no monitoring. 
B) the worker receives the market wage and requires full-time monitoring. 
C) the cost of monitoring the worker equals the efficiency wage. 
D) the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one.

Question 20

With full information,any contract will lead to production efficiency.

Accepted Answer

A) True 
 B)False

Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will receive a share of the settlement if the plaintiff wins.Under this contract,

Alex is hired as a sales agent and receives 10% commission on the sales price.The contract he signed is a

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

Under which one of the following contracts does an agent have the least incentive to behave opportunistically?

Describe the characteristics of an efficient contract between a principal and an agent.

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

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,

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

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell an MP3 player is $12.If he receives 60% of the MP3 sales revenue,then

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 signed a fixed-fee rental contract with the store owner and pays $1000 as the rent,

Piece rates are practical when

To reduce moral hazard,a firm may

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

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

Monitoring is often used by firms in an attempt to decrease

A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until

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

Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will receive a share of the settlement if the plaintiff wins.Under this contract,

Alex is hired as a sales agent and receives 10% commission on the sales price.The contract he signed is a

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

Under which one of the following contracts does an agent have the least incentive to behave opportunistically?

Describe the characteristics of an efficient contract between a principal and an agent.

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

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,

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

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell an MP3 player is $12.If he receives 60% of the MP3 sales revenue,then

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 signed a fixed-fee rental contract with the store owner and pays $1000 as the rent,

Piece rates are practical when

To reduce moral hazard,a firm may

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

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

Monitoring is often used by firms in an attempt to decrease

A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until

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