Question 1

Which of the following is true of opportunism?

Accepted Answer

A) Opportunism increases the possibility that a party can gain by disregarding the contract. 
B) Opportunism lowers the cost of negotiation between parties when the contract is incomplete or unclear. 
C) Opportunism allows parties to maximize the value of their transactions. 
D) Opportunism leads to mutually beneficial outcomes. 
A) Opportunism increases the possibility that a party can gain by disregarding the contract. 
B) Opportunism lowers the cost of negotiation between parties when the contract is incomplete or unclear. 
C) Opportunism allows parties to maximize the value of their transactions. 
D) Opportunism leads to mutually beneficial outcomes.

Question 2

The inability of client to monitor the efforts made by his lawyer to defend his case is an example of the principal/agent problem.

Accepted Answer

A) True 
 B)False

Question 3

The matrix given below represents the payoffs to producer Hansel and purchaser Gretel from a transaction.Hansel is the producer of Good X and Gretel is the purchaser.Assume that Gretel has no incentive to break the contract.

-Refer to Table .Will breaching of the contract be an efficient outcome?

Accepted Answer

A) Yes, because Hansel will earn $12 after paying expectation damage and Gretel will remain as well off as under the contract. 
B) No, because Hansel will earn $5 after paying expectation damage and Gretel will remain as well off as under the contract. 
C) Yes, because both Hansel and Gretel will remain as well off as under the contract and Gretel's earnings will increase. 
D) No, because Hansel will remain as well off as under the contract and Gretel's earnings will fall. 
A) Yes, because Hansel will earn $12 after paying expectation damage and Gretel will remain as well off as under the contract. 
B) No, because Hansel will earn $5 after paying expectation damage and Gretel will remain as well off as under the contract. 
C) Yes, because both Hansel and Gretel will remain as well off as under the contract and Gretel's earnings will increase. 
D) No, because Hansel will remain as well off as under the contract and Gretel's earnings will fall.

Question 4

Which of the following features was prominent in the airline industry during the 1950s?

Accepted Answer

A) The airlines had to concentrate on cost reduction. 
B) The airlines had to lower the frequency of flights to meet rising costs. 
C) The airlines served food prepared by their own employees or by other airlines. 
D) The airlines industry was revolutionized by low-cost budget airlines. 
A) The airlines had to concentrate on cost reduction. 
B) The airlines had to lower the frequency of flights to meet rising costs. 
C) The airlines served food prepared by their own employees or by other airlines. 
D) The airlines industry was revolutionized by low-cost budget airlines.

Question 5

Which of the following is an example of vertical integration?

Accepted Answer

A) An industrialist building new plants in a country where operation costs are low. 
B) A cosmetic company collaborating with worldwide retailers to market its product. 
C) A fruit juice manufacturer purchasing orchards. 
D) An exporter delivering goods at a contracted price. 
A) An industrialist building new plants in a country where operation costs are low. 
B) A cosmetic company collaborating with worldwide retailers to market its product. 
C) A fruit juice manufacturer purchasing orchards. 
D) An exporter delivering goods at a contracted price.

Question 6

Which of the following exemplifies specific performance that a court might order from the party in breach of a contract?

Accepted Answer

A) A seller ordered to pay back the price of the commodity to the customer having failed to deliver it on-time. 
B) A popular singer requested to forgo the fee for her performance at a social fund raising program. 
C) The owner of a polluting factory ordered to convert his private plot into a public garden. 
D) A movie director ordered to work with an actress he had previously contracted with, instead of one he later found was available for a lower price. 
A) A seller ordered to pay back the price of the commodity to the customer having failed to deliver it on-time. 
B) A popular singer requested to forgo the fee for her performance at a social fund raising program. 
C) The owner of a polluting factory ordered to convert his private plot into a public garden. 
D) A movie director ordered to work with an actress he had previously contracted with, instead of one he later found was available for a lower price.

Question 7

Under which circumstances does vertical integration become useful?

Accepted Answer

In situations where contracts

Question 8

The matrix given below represents the payoffs to producer Hansel and purchaser Gretel from a transaction.Hansel is the producer of Good X and Gretel is the purchaser.Assume that Gretel has no incentive to break the contract.

-Refer to Table .If the law requires Hansel to pay $10 to Gretel for breaching the contract:

Accepted Answer

A) Hansel would breach the agreement even when economic efficiency requires him to keep the agreement. 
B) Hansel would abide by the agreement even when economic efficiency requires that he breach it. 
C) Hansel would abide by the agreement and total economic value of the transaction will be maximized. 
D) Hansel would breach the agreement and total economic value of the transaction will be maximized. 
A) Hansel would breach the agreement even when economic efficiency requires him to keep the agreement. 
B) Hansel would abide by the agreement even when economic efficiency requires that he breach it. 
C) Hansel would abide by the agreement and total economic value of the transaction will be maximized. 
D) Hansel would breach the agreement and total economic value of the transaction will be maximized.

Question 9

_____ is a contract that specifies actions to be taken if various situations come to prevail.

Accepted Answer

A) An insurance policy 
B) Contingency 
C) Unitization 
D) An escalator 
A) An insurance policy 
B) Contingency 
C) Unitization 
D) An escalator

Question 10

Which of the following is NOT true of an incomplete contract?

Accepted Answer

A) It discourages parties from acting opportunistically. 
B) It increases the cost of negotiation. 
C) It allows renegotiation among parties if certain events occur. 
D) It contains provisions for terminating the contract if certain events occur. 
A) It discourages parties from acting opportunistically. 
B) It increases the cost of negotiation. 
C) It allows renegotiation among parties if certain events occur. 
D) It contains provisions for terminating the contract if certain events occur.

Question 11

Suppose Bella had entered into a contract to rent Michelle's apartment for one year.The contract mentioned that if either of the two parties breached it, the other was to recover her loss.If Michelle breaches the contract, a payment which leaves Bella no worse off than if the contract was honored, is called opportunistic damage.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following examples can be associated with the task specificity aspect of an asset?

Accepted Answer

A) An employer's investment in employee skill building. 
B) Purchasing machines which can be used to produce only a particular product. 
C) Building a facility in a low cost locality. 
D) An employer's investment in office renovation. 
A) An employer's investment in employee skill building. 
B) Purchasing machines which can be used to produce only a particular product. 
C) Building a facility in a low cost locality. 
D) An employer's investment in office renovation.

Question 13

The matrix given below represents the payoffs to producer Hansel and purchaser Gretel from a transaction.Hansel is the producer of Good X and Gretel is the purchaser.Assume that Gretel has no incentive to break the contract.

-Refer to Table .Under expectation damages, if Hansel breaches the contract he would have to pay Gretel:

Accepted Answer

A) $10. 
B) $5. 
C) $8. 
D) $3. 
A) $10. 
B) $5. 
C) $8. 
D) $3.

Question 14

Asset specificity means lower costs of redeployment and lower risks of opportunism associated with a contract.

Accepted Answer

A) True 
 B)False

Question 15

The matrix given below represents the payoffs to oil well owners Mike and Frasel if they enter into a unitization contract.Each of the owners know the exact amount of oil in the pool and the market price of oil.

-Refer to Table .What would be the combined gain of the two owners if they maintain the unitization contract?

Accepted Answer

A) $22 
B) $28 
C) $20 
D) $0 
A) $22 
B) $28 
C) $20 
D) $0

Question 16

A capitation arrangement between the plaintiff and the defendant in a lawsuit helps to reduce the problems of monitoring and uncertainty associated with a principal/agent relationship.

Accepted Answer

A) True 
 B)False

Question 17

The matrix given below represents the payoffs to oil well owners Mike and Frasel if they enter into a unitization contract.Each of the owners know the exact amount of oil in the pool and the market price of oil.

-Refer to Table .Under expectation damages, Frasel's breach of the contract would lower his net payoff to:

Accepted Answer

A) $6. 
B) $8. 
C) $16. 
D) $10. 
A) $6. 
B) $8. 
C) $16. 
D) $10.

Question 18

The parties to a contract usually try to minimize the risks of costly opportunistic behavior by putting appropriate provisions in it.

Accepted Answer

A) True 
 B)False

Question 19

The matrix given below represents the payoffs to oil well owners Mike and Frasel if they enter into a unitization contract.Each of the owners know the exact amount of oil in the pool and the market price of oil.

-Refer to Table .If Mike has to pay Frasel expectation damages what would be his net payoff from the breach?

Accepted Answer

A) $8 
B) $10 
C) $0 
D) $6 
A) $8 
B) $10 
C) $0 
D) $6

Question 20

An organization offers training programs for its employees at a subsidized rate to help them use a nascent technology that the organization is adopting.The trained employees later bargain for a higher wage from the management as their probability of finding better paying jobs increase because some other companies are also adopting it.This action of the employees is an example of:

Accepted Answer

A) selfishness. 
B) holding up. 
C) opportunism. 
D) specificity. 
A) selfishness. 
B) holding up. 
C) opportunism. 
D) specificity.

Which of the following is true of opportunism?

The inability of client to monitor the efforts made by his lawyer to defend his case is an example of the principal/agent problem.

The matrix given below represents the payoffs to producer Hansel and purchaser Gretel from a transaction.Hansel is the producer of Good X and Gretel is the purchaser.Assume that Gretel has no incentive to break the contract. -Refer to Table .Will breaching of the contract be an efficient outcome?

Which of the following features was prominent in the airline industry during the 1950s?

Which of the following is an example of vertical integration?

Which of the following exemplifies specific performance that a court might order from the party in breach of a contract?

Under which circumstances does vertical integration become useful?

_____ is a contract that specifies actions to be taken if various situations come to prevail.

Which of the following is NOT true of an incomplete contract?

Which of the following examples can be associated with the task specificity aspect of an asset?

Asset specificity means lower costs of redeployment and lower risks of opportunism associated with a contract.

A capitation arrangement between the plaintiff and the defendant in a lawsuit helps to reduce the problems of monitoring and uncertainty associated with a principal/agent relationship.

The parties to a contract usually try to minimize the risks of costly opportunistic behavior by putting appropriate provisions in it.

Reasoning With Economics: Models and Information

Transactions and Institutions: the Building Blocks

Markets

Cost and Production

Extreme Markets I: Perfect Competition

Extreme Markets II: Monopoly

Between the Extremes: Interaction and Strategy

Competition and Strategy

Beyond Markets; Property and Contracts

Risk and Information in Contracts

Organizations in Concept and Practice

Organizational Design

Vertical Relationships

Employment Relationships

Time, Risk and Options

Conflict, Negotiation and Group Choice

Filters

Exam 10: The Economics of Contracts

Which of the following is true of opportunism?

The inability of client to monitor the efforts made by his lawyer to defend his case is an example of the principal/agent problem.

The matrix given below represents the payoffs to producer Hansel and purchaser Gretel from a transaction.Hansel is the producer of Good X and Gretel is the purchaser.Assume that Gretel has no incentive to break the contract. -Refer to Table .Will breaching of the contract be an efficient outcome?

Which of the following features was prominent in the airline industry during the 1950s?

Which of the following is an example of vertical integration?

Which of the following exemplifies specific performance that a court might order from the party in breach of a contract?

Under which circumstances does vertical integration become useful?

_____ is a contract that specifies actions to be taken if various situations come to prevail.

Which of the following is NOT true of an incomplete contract?

Which of the following examples can be associated with the task specificity aspect of an asset?

Asset specificity means lower costs of redeployment and lower risks of opportunism associated with a contract.

A capitation arrangement between the plaintiff and the defendant in a lawsuit helps to reduce the problems of monitoring and uncertainty associated with a principal/agent relationship.

The parties to a contract usually try to minimize the risks of costly opportunistic behavior by putting appropriate provisions in it.

Reasoning With Economics: Models and Information

Transactions and Institutions: the Building Blocks

Markets

Cost and Production

Extreme Markets I: Perfect Competition

Extreme Markets II: Monopoly

Between the Extremes: Interaction and Strategy

Competition and Strategy

Beyond Markets; Property and Contracts

Risk and Information in Contracts

Organizations in Concept and Practice

Organizational Design

Vertical Relationships

Employment Relationships

Time, Risk and Options

Conflict, Negotiation and Group Choice

Filters