Question 1

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 2

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for an 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 3

Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) screening. 
D) signaling. 
A) adverse selection. 
B) moral hazard. 
C) screening. 
D) signaling.

Question 4

If information is asymmetric,explain why the hire contract is not efficient in production and a moral hazard exists,but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem.

Accepted Answer

With the hire contract,the agent has no

Question 5

In the presence of asymmetric information,the only contract that results in production efficiency and no moral hazard is the one in which

Accepted Answer

A) the agent receives a fixed fee. 
B) the principal receives a fixed rent. 
C) profit is shared. 
D) revenue is shared. 
A) the agent receives a fixed fee. 
B) the principal receives a fixed rent. 
C) profit is shared. 
D) revenue is shared.

Question 6

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 7

One way to prevent workers from shirking is to

Accepted Answer

A) hire only workers who are predisposed toward shirking. 
B) hire only workers who are predisposed toward not shirking. 
C) reduce monitoring to zero. 
D) pay workers a fixed fee. 
A) hire only workers who are predisposed toward shirking. 
B) hire only workers who are predisposed toward not shirking. 
C) reduce monitoring to zero. 
D) pay workers a fixed fee.

Question 8

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

Accepted Answer

Under commission,a good salesperson will

Question 9

The benefit to employers of deferred-payments is that

Accepted Answer

A) adverse selection is eliminated. 
B) employers cannot engage in any opportunistic behavior. 
C) these payments raise the cost of being fired,so more monitoring is needed. 
D) these payments raise the cost of being fired,so less monitoring is needed. 
A) adverse selection is eliminated. 
B) employers cannot engage in any opportunistic behavior. 
C) these payments raise the cost of being fired,so more monitoring is needed. 
D) these payments raise the cost of being fired,so less monitoring is needed.

Question 10

In the presence of asymmetric information,a contingent contract

Accepted Answer

A) achieves production efficiency. 
B) can lead to opportunistic behavior on the part of the agent. 
C) is impossible to write. 
D) will result in the principal earning all of the profit. 
A) achieves production efficiency. 
B) can lead to opportunistic behavior on the part of the agent. 
C) is impossible to write. 
D) will result in the principal earning all of the profit.

Question 11

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is efficiency in risk bearing assured?

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) It is impossible to determine without the degree of risk aversion for each. 
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) It is impossible to determine without the degree of risk aversion for each.

Question 12

Production inefficiency is more likely to occur when the principal has more information about work performance than the agent does.

Accepted Answer

A) True 
 B)False

Question 13

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is production efficiency assured?

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 14

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 15

When shirking at the workplace occurs,increased monitoring of workers is the only effective way to reduce this behavior.

Accepted Answer

A) True 
 B)False

Question 16

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 receives $12 for each MP3 player he sells from the store owner and the store owner controls the quantity of MP3's available for sale,then

Accepted Answer

A) 40 MP3 players will be sold. 
B) joint profit is $798. 
C) joint profit will be maximized. 
D) Nick will sell as many as he can. 
A) 40 MP3 players will be sold. 
B) joint profit is $798. 
C) joint profit will be maximized. 
D) Nick will sell as many as he can.

Question 17

Suppose an employer has monitoring devices established so that the probability of an employee being caught while shirking is 0.2.If the gain to the employee from shirking is $1,000,how large a bond will deter shirking?

Accepted Answer

B = 1000/0.2 = $5,000.With a $

Question 18

When does it make sense to offer a worker a piece-rate contract?

Accepted Answer

Piece-rate contracts require that a work

Question 19

In a store that sells souvenirs,suppose an agent receives a $1 commission for each unit sold,and the principal receives the residual profit.As a result,

Accepted Answer

A) joint profit is maximized. 
B) the agent will sell until the principal's marginal cost equals $1. 
C) no agent would enter into such a contract. 
D) the agent wishes to sell as many units as he can. 
A) joint profit is maximized. 
B) the agent will sell until the principal's marginal cost equals $1. 
C) no agent would enter into such a contract. 
D) the agent wishes to sell as many units as he can.

Question 20

Suppose employees pay a bond of $1,000 to an employer.The gain from shirking is $400.Monitoring devices have been installed so that there is a 50% chance of being caught if you are shirking.The company is considering the installation of additional monitoring devices to increase the chance of catching a shirker to 100%.They feel this is needed to deter all shirking.What is your recommendation to the company? Explain.

Accepted Answer

Shirking is already deterred;t

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

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

Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid

If information is asymmetric,explain why the hire contract is not efficient in production and a moral hazard exists,but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem.

In the presence of asymmetric information,the only contract that results in production efficiency and no moral hazard is the one in which

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

One way to prevent workers from shirking is to

The benefit to employers of deferred-payments is that

In the presence of asymmetric information,a contingent contract

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is efficiency in risk bearing assured?

Production inefficiency is more likely to occur when the principal has more information about work performance than the agent does.

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is production efficiency assured?

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

When shirking at the workplace occurs,increased monitoring of workers is the only effective way to reduce this behavior.

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 receives $12 for each MP3 player he sells from the store owner and the store owner controls the quantity of MP3's available for sale,then

Suppose an employer has monitoring devices established so that the probability of an employee being caught while shirking is 0.2.If the gain to the employee from shirking is $1,000,how large a bond will deter shirking?

When does it make sense to offer a worker a piece-rate contract?

In a store that sells souvenirs,suppose an agent receives a $1 commission for each unit sold,and the principal receives the residual profit.As a result,

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

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

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

Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid

If information is asymmetric,explain why the hire contract is not efficient in production and a moral hazard exists,but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem.

In the presence of asymmetric information,the only contract that results in production efficiency and no moral hazard is the one in which

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

One way to prevent workers from shirking is to

The benefit to employers of deferred-payments is that

In the presence of asymmetric information,a contingent contract

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is efficiency in risk bearing assured?

Production inefficiency is more likely to occur when the principal has more information about work performance than the agent does.

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is production efficiency assured?

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

When shirking at the workplace occurs,increased monitoring of workers is the only effective way to reduce this behavior.

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 receives $12 for each MP3 player he sells from the store owner and the store owner controls the quantity of MP3's available for sale,then

Suppose an employer has monitoring devices established so that the probability of an employee being caught while shirking is 0.2.If the gain to the employee from shirking is $1,000,how large a bond will deter shirking?

When does it make sense to offer a worker a piece-rate contract?

In a store that sells souvenirs,suppose an agent receives a $1 commission for each unit sold,and the principal receives the residual profit.As a result,

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