Question 1

Socially inefficient outcomes are possible when

Accepted Answer

A)  uninformed parties want to avoid opportunistic behavior by informed parties. 
B)  informed parties engage in opportunistic behavior against uninformed parties. 
C)  those in charge are risk neutral. 
D)  workers do not own the firm. 
A)  uninformed parties want to avoid opportunistic behavior by informed parties. 
B)  informed parties engage in opportunistic behavior against uninformed parties. 
C)  those in charge are risk neutral. 
D)  workers do not own the firm. A

Question 2

An efficient contract is an agreement in which

Accepted Answer

A)  neither party can be made better off without harming the other party. 
B)  both parties agree on its clauses. 
C)  one party takes all. 
D)  both parties agree to always do their best. 
A)  neither party can be made better off without harming the other party. 
B)  both parties agree on its clauses. 
C)  one party takes all. 
D)  both parties agree to always do their best. A

Question 3

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. C

Question 4

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 5

If a firm was owned by its employees,

Accepted Answer

A)  there is a higher probability that wage reductions would outweigh layoffs. 
B)  those in charge would not act any differently than regular owners; there would still be layoffs. 
C)  those not in charge would remain risk neutral. 
D)  wage reductions would be lower than if the firm was run for profit. 
A)  there is a higher probability that wage reductions would outweigh layoffs. 
B)  those in charge would not act any differently than regular owners; there would still be layoffs. 
C)  those not in charge would remain risk neutral. 
D)  wage reductions would be lower than if the firm was run for profit.

Question 6

Shay is risk averse and has a reservation wage of $50.She is offered two different labor contracts.One is a fixed wage of $100 per day,and the other is a piece-rate contract.In the latter,the pay rate is $1 per piece.In a good day she sells 160 units,and in bad day she sells 40 units.The likelihood of a good or a bad day is 50%.

Accepted Answer

A)  Shay accepts the fixed wage contract. 
B)  Shay declines both contracts. 
C)  Shay accepts the piece-rate contract. 
D)  Shay is indifferent between both contracts. 
A)  Shay accepts the fixed wage contract. 
B)  Shay declines both contracts. 
C)  Shay accepts the piece-rate contract. 
D)  Shay is indifferent between both contracts.

Question 7

In the presence of asymmetric information,

Accepted Answer

A)  all contracts are efficient. 
B)  efficiency in risk bearing cannot be achieved. 
C)  a trade-off exists between risk-bearing efficiency and production efficiency. 
D)  no contracting will take place. 
A)  all contracts are efficient. 
B)  efficiency in risk bearing cannot be achieved. 
C)  a trade-off exists between risk-bearing efficiency and production efficiency. 
D)  no contracting will take place.

Question 8

Why would a firm knowingly hire lazy employees?

Accepted Answer

A)  Lazy employees have positive marginal revenue product. 
B)  Lazy employees have successfully sued firms in the past. 
C)  The Americans with Disabilities Act mandates that laziness be considered a disability. 
D)  Lazy employees make hard-working employees look good. 
A)  Lazy employees have positive marginal revenue product. 
B)  Lazy employees have successfully sued firms in the past. 
C)  The Americans with Disabilities Act mandates that laziness be considered a disability. 
D)  Lazy employees make hard-working employees look good.

Question 9

Author A accepts a $5,000 advance and a 10% royalty after 5,000 books are sold.Author B foregoes the advance and negotiates for a 15% royalty on all books sold.Author C decides to self publish his book and keep 50% of all sales revenue.Which of these authors expects to sell the fewest books?

Accepted Answer

A)  Author A 
B)  Author B 
C)  Author C 
D)  They are all equally likely. 
A)  Author A 
B)  Author B 
C)  Author C 
D)  They are all equally likely.

Question 10

An efficiency wage premium serves the same function as a bond because,just as with a bond,the premium represents

Accepted Answer

A)  the amount the employee loses if caught shirking. 
B)  the expected value of the amount the employee loses if he shirks. 
C)  the cost of monitoring the employee. 
D)  the gain to the employee if he shirks. 
A)  the amount the employee loses if caught shirking. 
B)  the expected value of the amount the employee loses if he shirks. 
C)  the cost of monitoring the employee. 
D)  the gain to the employee if he shirks.

Question 11

A major problem inherent in posting bonds is that

Accepted Answer

A)  workers are not trustworthy. 
B)  workers may not have enough wealth to post them. 
C)  workers cannot find co-signers. 
D)  All of the above. 
A)  workers are not trustworthy. 
B)  workers may not have enough wealth to post them. 
C)  workers cannot find co-signers. 
D)  All of the above.

Question 12

A key aspect of the principal-agent problem is that

Accepted Answer

A)  the principal cannot perfectly monitor the agent's actions. 
B)  the principal can perfectly monitor the agent's actions. 
C)  the output level does not depend on the agent's actions. 
D)  the principal is always risk averse. 
A)  the principal cannot perfectly monitor the agent's actions. 
B)  the principal can perfectly monitor the agent's actions. 
C)  the output level does not depend on the agent's actions. 
D)  the principal is always risk averse.

Question 13

In a principal-agent problem,if the contract used leads to the maximum of the principal's and agent's combined value (profits,payoffs),we can say that this contract features

Accepted Answer

A)  inefficiency in production, since only the principal's profits should be maximized. 
B)  inefficiency in production, since only the agent's payoffs should be maximized. 
C)  efficiency in production. 
D)  inefficiency in production, since the agent's payoffs should be maximized and the principal's profits should be minimized. 
A)  inefficiency in production, since only the principal's profits should be maximized. 
B)  inefficiency in production, since only the agent's payoffs should be maximized. 
C)  efficiency in production. 
D)  inefficiency in production, since the agent's payoffs should be maximized and the principal's profits should be minimized.

Question 14

Author A accepts a $5,000 advance and a 10% royalty after 5,000 books are sold.Author B foregoes the advance and negotiates for a 15% royalty on all books sold.Author C decides to self publish his book and keep 50% of all sales revenue.Which of these authors is most likely to have 10 books published?

Accepted Answer

A)  Author A 
B)  Author B 
C)  Author C 
D)  They are all equally likely. 
A)  Author A 
B)  Author B 
C)  Author C 
D)  They are all equally likely.

Question 15

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 16

A firm uses an efficiency wage scheme to deter workers from shirking,which is detected 10% of the times.Suppose a risk-neutral worker that has a reservation wage of $500.The industry ongoing wage is $1000.What is the efficiency wage paid by this firm?

Accepted Answer

A)  $6,000 
B)  $5,000 
C)  $1,500 
D)  $2,000 
A)  $6,000 
B)  $5,000 
C)  $1,500 
D)  $2,000

Question 17

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 18

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 19

Author A accepts a $5,000 advance and a 10% royalty after 5,000 books are sold.Author B foregoes the advance and negotiates for a 15% royalty on all books sold.Author C decides to self publish his book and keep 50% of all sales revenue.In what order of risk aversion (from most to least)would you rank these authors?

Accepted Answer

A)  Author A, Author B, Author C 
B)  Author A, Author C, Author B 
C)  Author B, Author A, Author C 
D)  Author C, Author B, Author A 
A)  Author A, Author B, Author C 
B)  Author A, Author C, Author B 
C)  Author B, Author A, Author C 
D)  Author C, Author B, Author A

Question 20

The type of contract selected depends on the information available to the parties.

Accepted Answer

A) True 
 B)False

Socially inefficient outcomes are possible when

An efficient contract is an agreement in which

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

If a firm was owned by its employees,

In the presence of asymmetric information,

Why would a firm knowingly hire lazy employees?

Author A accepts a $5,000 advance and a 10% royalty after 5,000 books are sold.Author B foregoes the advance and negotiates for a 15% royalty on all books sold.Author C decides to self publish his book and keep 50% of all sales revenue.Which of these authors expects to sell the fewest books?

An efficiency wage premium serves the same function as a bond because,just as with a bond,the premium represents

A major problem inherent in posting bonds is that

A key aspect of the principal-agent problem is that

In a principal-agent problem,if the contract used leads to the maximum of the principal's and agent's combined value (profits,payoffs),we can say that this contract features

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

A firm uses an efficiency wage scheme to deter workers from shirking,which is detected 10% of the times.Suppose a risk-neutral worker that has a reservation wage of $500.The industry ongoing wage is $1000.What is the efficiency wage paid by this firm?

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

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

The type of contract selected depends on the information available to the parties.

Introduction

Supply and Demand

Applying the Supply-And-Demand Model

Consumer Choice

Applying Consumer Theory

Firms and Production

Costs

Competitive Firms and Markets

Applying the Competitive Model

General Equilibrium and Economic Welfare

Monopoly

Pricing and Advertising

Oligopoly and Monopolistic Competition

Game Theory

Factor Markets

Interest Rates, Investments, and Capital Markets

Uncertainty

Externalities, Open-Access, and Public Goods

Asymmetric Information

Filters

Exam 20: Contracts and Moral Hazards

Socially inefficient outcomes are possible when

An efficient contract is an agreement in which

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

If a firm was owned by its employees,

In the presence of asymmetric information,

Why would a firm knowingly hire lazy employees?

Author A accepts a $5,000 advance and a 10% royalty after 5,000 books are sold.Author B foregoes the advance and negotiates for a 15% royalty on all books sold.Author C decides to self publish his book and keep 50% of all sales revenue.Which of these authors expects to sell the fewest books?

An efficiency wage premium serves the same function as a bond because,just as with a bond,the premium represents

A major problem inherent in posting bonds is that

A key aspect of the principal-agent problem is that

In a principal-agent problem,if the contract used leads to the maximum of the principal's and agent's combined value (profits,payoffs),we can say that this contract features

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

A firm uses an efficiency wage scheme to deter workers from shirking,which is detected 10% of the times.Suppose a risk-neutral worker that has a reservation wage of $500.The industry ongoing wage is $1000.What is the efficiency wage paid by this firm?

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

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

The type of contract selected depends on the information available to the parties.

Introduction

Supply and Demand

Applying the Supply-And-Demand Model

Consumer Choice

Applying Consumer Theory

Firms and Production

Costs

Competitive Firms and Markets

Applying the Competitive Model

General Equilibrium and Economic Welfare

Monopoly

Pricing and Advertising

Oligopoly and Monopolistic Competition

Game Theory

Factor Markets

Interest Rates, Investments, and Capital Markets

Uncertainty

Externalities, Open-Access, and Public Goods

Asymmetric Information

Filters