Question 1

Workers prefer layoffs to wage reductions during economic downturns because

Accepted Answer

A) layoffs benefit workers more than the firms. 
B) workers try to provide firms with incentives to report true economic conditions. 
C) firms will keep workers even during economic downturns to avoid more costs. 
D) there is symmetric information. 
A) layoffs benefit workers more than the firms. 
B) workers try to provide firms with incentives to report true economic conditions. 
C) firms will keep workers even during economic downturns to avoid more costs. 
D) there is symmetric information.

Question 2

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

Accepted Answer

A) achieves production efficiency. 
B) can lead to agents producing more output than would occur under a fixed-rent-paid-to-the-principal contract. 
C) is impossible to write. 
D) will result in the principal earning all of the profit. 
A) achieves production efficiency. 
B) can lead to agents producing more output than would occur under a fixed-rent-paid-to-the-principal contract. 
C) is impossible to write. 
D) will result in the principal earning all of the profit.

Question 3

One reason that lawyers might prefer a contingent contract when representing a plaintiff in a tort case is that

Accepted Answer

A) lawyers are risk neutral. 
B) diversification of many cases allows lawyers to reduce risk. 
C) lawyers are typically confident about winning every case. 
D) hourly rates for lawyers are usually very low. 
A) lawyers are risk neutral. 
B) diversification of many cases allows lawyers to reduce risk. 
C) lawyers are typically confident about winning every case. 
D) hourly rates for lawyers are usually very low.

Question 4

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 5

If an agent is risk neutral and a principal is risk averse,which of the following contracts would be efficient in risk bearing?

Accepted Answer

A) A fixed fee is paid to the agent. 
B) A fixed fee is paid to the principal. 
C) An hourly rate is paid to the agent. 
D) The agent enjoys a share of the profit. 
A) A fixed fee is paid to the agent. 
B) A fixed fee is paid to the principal. 
C) An hourly rate is paid to the agent. 
D) The agent enjoys a share of the profit.

Question 6

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 7

Which of the following could prevent the opportunistic behavior of firms?

Accepted Answer

A) efficient contracts 
B) good reputation 
C) revealing relevant information about firms 
D) All of the above 
A) efficient contracts 
B) good reputation 
C) revealing relevant information about firms 
D) All of the above

Question 8

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 9

Suppose a plaintiff hires a lawyer to represent her in a court case.She agrees to pay the lawyer a wage per hour.She knows precisely what the lawyer should do and how long each activity should take,and she can verify that the lawyer has correctly completed each activity.She can terminate the contract at any time.With this contract,

Accepted Answer

A) the lawyer bears all the risk. 
B) the risk is shared by the lawyer and the plaintiff. 
C) production efficiency can be achieved. 
D) production efficiency is impossible. 
A) the lawyer bears all the risk. 
B) the risk is shared by the lawyer and the plaintiff. 
C) production efficiency can be achieved. 
D) production efficiency is impossible.

Question 10

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 11

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

Accepted Answer

A) True 
 B)False

Question 12

In the presence of asymmetric information,a hire 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 13

When the production of a worker is relatively easily observable,the firm can pay a piece-rate.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Sam is suing someone in court for $10,000.The probability that Sam will lose the case is 1/h where h is the number of hours that Sam's attorney works on the case.The lawyer charges $500 per hour if he is to be paid hourly,or he requests 20% of the settlement if he is to be paid on a contingency basis.Assuming both Sam and the attorney are risk-neutral wealth maximizers,is either contract efficient?

Accepted Answer

First determine the expected value of th

Question 16

If all firms pay an efficiency wage,then

Accepted Answer

A) there is no cost to shirking because the shirking worker can receive his high wage at another firm after being caught and fired. 
B) the macroeconomy would enjoy a prolonged period of near-zero unemployment. 
C) there is a cost to shirking because the efficiency wage is less than it would have been if only a few firms paid it. 
D) there is a cost to shirking because the shirking worker will spend a greater time unemployed after being caught and fired. 
A) there is no cost to shirking because the shirking worker can receive his high wage at another firm after being caught and fired. 
B) the macroeconomy would enjoy a prolonged period of near-zero unemployment. 
C) there is a cost to shirking because the efficiency wage is less than it would have been if only a few firms paid it. 
D) there is a cost to shirking because the shirking worker will spend a greater time unemployed after being caught and fired.

Question 17

Explain how more than one possible state of nature affects contract choices.

Accepted Answer

The uncertainty of the state o

Question 18

Efficiency in risk bearing implies that

Accepted Answer

A) risk is completely eliminated. 
B) the least risk-averse party bears most of the risk. 
C) the most risk-averse party bears most of the risk. 
D) all of the risk is borne by just one of the parties,regardless of the degree of risk aversion. 
A) risk is completely eliminated. 
B) the least risk-averse party bears most of the risk. 
C) the most risk-averse party bears most of the risk. 
D) all of the risk is borne by just one of the parties,regardless of the degree of risk aversion.

Question 19

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

Workers prefer layoffs to wage reductions during economic downturns because

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

One reason that lawyers might prefer a contingent contract when representing a plaintiff in a tort case is that

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

If an agent is risk neutral and a principal is risk averse,which of the following contracts would be efficient in risk bearing?

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

Which of the following could prevent the opportunistic behavior of firms?

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

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

In the presence of asymmetric information,a hire contract

When the production of a worker is relatively easily observable,the firm can pay a piece-rate.

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

If all firms pay an efficiency wage,then

Explain how more than one possible state of nature affects contract choices.

Efficiency in risk bearing implies that

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

Workers prefer layoffs to wage reductions during economic downturns because

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

One reason that lawyers might prefer a contingent contract when representing a plaintiff in a tort case is that

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

If an agent is risk neutral and a principal is risk averse,which of the following contracts would be efficient in risk bearing?

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

Which of the following could prevent the opportunistic behavior of firms?

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

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

In the presence of asymmetric information,a hire contract

When the production of a worker is relatively easily observable,the firm can pay a piece-rate.

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

If all firms pay an efficiency wage,then

Explain how more than one possible state of nature affects contract choices.

Efficiency in risk bearing implies that

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