Question 1

How can an incomplete contract prevent opportunism? Explain with an example.

Accepted Answer

A complete contract can create incentive

Question 2

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 if both breach the unitization contract?

Accepted Answer

A) $22 
B) $20 
C) $28 
D) $32 
A) $22 
B) $20 
C) $28 
D) $32

Question 3

A contract may remain incomplete because the expected benefits of greater completeness do not cover the costs of drafting it.

Accepted Answer

A) True 
 B)False

Question 4

How do buyers and sellers benefit from a contract?

Accepted Answer

More value might be created if a buyer a

Question 5

Under a principal/agent relationship, the agent faces high costs of determining whether the principal is actually making efforts to the extent the agent expects.

Accepted Answer

A) True 
 B)False

Question 6

Parties to the contract prefer to keep the actual agreement incomplete when:

Accepted Answer

A) they have conflicting terms and conditions. 
B) they are large in count. 
C) the economic value of the contract is low. 
D) the cost of negotiation is high. 
A) they have conflicting terms and conditions. 
B) they are large in count. 
C) the economic value of the contract is low. 
D) the cost of negotiation is high.

Question 7

Maximizing the benefits of a transaction made under a contract often requires specific investments that lose value if the parties fail to fulfill their commitments.

Accepted Answer

A) True 
 B)False

Question 8

How does opportunistic behavior affect a contract?

Accepted Answer

Opportunism creates a possibility that a

Question 9

Which of the following is an example of a principal/agent relationship?

Accepted Answer

A) Banks lending money to start-up companies. 
B) An investment banker investing the client's money into different securities. 
C) Advance booking for a car after watching its promos at a car show. 
D) Investing your money in fixed-return deposits and government securities. 
A) Banks lending money to start-up companies. 
B) An investment banker investing the client's money into different securities. 
C) Advance booking for a car after watching its promos at a car show. 
D) Investing your money in fixed-return deposits and government securities.

Question 10

Explain the concept of liquidated damages with an example.

Accepted Answer

The legal remedy for a breach is often l

Question 11

Fixing a payment schedule in an agreement:

Accepted Answer

A) allows the seller to easily access loanable funds. 
B) increases the uncertainty associated with the cost of production. 
C) allows the seller to charge a high price for his product. 
D) ensures the delivery of goods at a high price. 
A) allows the seller to easily access loanable funds. 
B) increases the uncertainty associated with the cost of production. 
C) allows the seller to charge a high price for his product. 
D) ensures the delivery of goods at a high price.

Question 12

If liquidated damages stated in a contract are too low, inefficient breaches will be profitable, and if damages are too high, efficient breaches will not occur.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following can be classified as a highly specific asset?

Accepted Answer

A) A country's soldiers 
B) A wind turbine in an installation that produces "renewable" electricity 
C) A cattle farm 
D) A cruise ship 
A) A country's soldiers 
B) A wind turbine in an installation that produces "renewable" electricity 
C) A cattle farm 
D) A cruise ship

Question 14

What does an efficient payment scheme in a principal/agent relationship depend on?

Accepted Answer

The efficient payment scheme i

Question 15

Assume that James owns a wheat farm that produces an annual crop of 500 bushels.His only choice is to store it in a nearby grain elevator owned by Martin, whose facility will be empty unless James is using it.Martin contracts with James to provide storage at $5 per bushel every month.In this example James and Martin are in:

Accepted Answer

A) probabilistic positions. 
B) asymptotic positions. 
C) hypothetical positions. 
D) symmetric positions. 
A) probabilistic positions. 
B) asymptotic positions. 
C) hypothetical positions. 
D) symmetric positions.

Question 16

If each of the parties to a contract controls a resource essential for the other's survival, opportunistic behavior by any of them will increase the value of the transaction.

Accepted Answer

A) True 
 B)False

Question 17

Incompleteness of a contract can be considered boundedly rational if at the time the parties draft the agreement they do not know how they can best react to certain contingencies.

Accepted Answer

A) True 
 B)False

Question 18

In which of these situations is vertical integration most likely?

Accepted Answer

A) A cargo distribution company's vertical integration into storage. 
B) An airline's vertical integration into aircraft design and manufacture. 
C) A coal miner's vertical integration into thermal power generation. 
D) An airline's vertical integration into food production. 
A) A cargo distribution company's vertical integration into storage. 
B) An airline's vertical integration into aircraft design and manufacture. 
C) A coal miner's vertical integration into thermal power generation. 
D) An airline's vertical integration into food production.

Question 19

A payment arrangement between an attorney and a plaintiff, in which the plaintiff agrees to pay a certain lump-sum amount at the outset and no more in the future, regardless of how the case develops is called:

Accepted Answer

A) contingency fees. 
B) capitation fees. 
C) liquidation. 
D) one-time settlement. 
A) contingency fees. 
B) capitation fees. 
C) liquidation. 
D) one-time settlement.

Question 20

What kind of a payment provision should a contract governing a principal/agent relationship contain?

Accepted Answer

Contracts that govern a principal/agent

How can an incomplete contract prevent opportunism? Explain with an example.

A contract may remain incomplete because the expected benefits of greater completeness do not cover the costs of drafting it.

How do buyers and sellers benefit from a contract?

Under a principal/agent relationship, the agent faces high costs of determining whether the principal is actually making efforts to the extent the agent expects.

Parties to the contract prefer to keep the actual agreement incomplete when:

Maximizing the benefits of a transaction made under a contract often requires specific investments that lose value if the parties fail to fulfill their commitments.

How does opportunistic behavior affect a contract?

Which of the following is an example of a principal/agent relationship?

Explain the concept of liquidated damages with an example.

Fixing a payment schedule in an agreement:

If liquidated damages stated in a contract are too low, inefficient breaches will be profitable, and if damages are too high, efficient breaches will not occur.

Which of the following can be classified as a highly specific asset?

What does an efficient payment scheme in a principal/agent relationship depend on?

If each of the parties to a contract controls a resource essential for the other's survival, opportunistic behavior by any of them will increase the value of the transaction.

Incompleteness of a contract can be considered boundedly rational if at the time the parties draft the agreement they do not know how they can best react to certain contingencies.

In which of these situations is vertical integration most likely?

A payment arrangement between an attorney and a plaintiff, in which the plaintiff agrees to pay a certain lump-sum amount at the outset and no more in the future, regardless of how the case develops is called:

What kind of a payment provision should a contract governing a principal/agent relationship contain?

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

How can an incomplete contract prevent opportunism? Explain with an example.

A contract may remain incomplete because the expected benefits of greater completeness do not cover the costs of drafting it.

How do buyers and sellers benefit from a contract?

Under a principal/agent relationship, the agent faces high costs of determining whether the principal is actually making efforts to the extent the agent expects.

Parties to the contract prefer to keep the actual agreement incomplete when:

Maximizing the benefits of a transaction made under a contract often requires specific investments that lose value if the parties fail to fulfill their commitments.

How does opportunistic behavior affect a contract?

Which of the following is an example of a principal/agent relationship?

Explain the concept of liquidated damages with an example.

Fixing a payment schedule in an agreement:

If liquidated damages stated in a contract are too low, inefficient breaches will be profitable, and if damages are too high, efficient breaches will not occur.

Which of the following can be classified as a highly specific asset?

What does an efficient payment scheme in a principal/agent relationship depend on?

If each of the parties to a contract controls a resource essential for the other's survival, opportunistic behavior by any of them will increase the value of the transaction.

Incompleteness of a contract can be considered boundedly rational if at the time the parties draft the agreement they do not know how they can best react to certain contingencies.

In which of these situations is vertical integration most likely?

A payment arrangement between an attorney and a plaintiff, in which the plaintiff agrees to pay a certain lump-sum amount at the outset and no more in the future, regardless of how the case develops is called:

What kind of a payment provision should a contract governing a principal/agent relationship contain?

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