Question 1

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 2

Which of the following would NOT be used by firms to deter shirking?

Accepted Answer

A)  requiring employees to post a bond 
B)  offering a bonus after five years of service 
C)  paying more than the market wage 
D)  paying less than the market wage 
A)  requiring employees to post a bond 
B)  offering a bonus after five years of service 
C)  paying more than the market wage 
D)  paying less than the market wage

Question 3

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

Accepted Answer

A)  production efficiency is not 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 not 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 4

Including an employee representative on the board of directors reduces the possibility of opportunistic employer behavior.

Accepted Answer

A) True 
 B)False

Question 5

When is a piece-rate contract generally used?

Accepted Answer

A)  It is used when output but not labor can be observed. 
B)  It is only used to avoid adverse selection. 
C)  It is used when labor but not output can be observed. 
D)  It is never used in practice. 
A)  It is used when output but not labor can be observed. 
B)  It is only used to avoid adverse selection. 
C)  It is used when labor but not output can be observed. 
D)  It is never used in practice.

Question 6

Sue offers to pay Al $50 for each painting of his that she sells in her gallery.Each painting sells for $75.The cost to Al of producing each painting is $55.Which of the following statements is TRUE about this contract?

Accepted Answer

A)  This contract is efficient. 
B)  This contract maximizes joint profit. 
C)  Al will not participate in this contract. 
D)  This is a fixed-fee contract. 
A)  This contract is efficient. 
B)  This contract maximizes joint profit. 
C)  Al will not participate in this contract. 
D)  This is a fixed-fee contract.

Question 7

Explain why checks on principals might be necessary.

Accepted Answer

Without checks,the employer (principal)m

Question 8

Sarah's demand for routine medical visits is q = 10 - 0.2p when she is healthy and q = 20 - 0.2p when she is sick.Medical visits cost $50 each if Sarah has no medical insurance.She is sick 20% of the time.Sarah is considering two different insurance plans.One offers free medical visits; the other plan costs less up front but requires that Sarah pay $5 per medical visit.Compare the two plans in terms of the trade-off between risk and moral hazard.

Accepted Answer

At $50 per visit,Sarah makes no visits w

Question 9

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 10

A firm uses an efficiency wage scheme to deter workers from shirking.A risk-neutral worker will NOT shirk if

Accepted Answer

A)  the expected loss from being fired is larger than or equal to the gain from shirking. 
B)  the expected loss from being fired is smaller than the gain from shirking. 
C)  the gain from shirking is positive. 
D)  the expected loss from being fired is zero. 
A)  the expected loss from being fired is larger than or equal to the gain from shirking. 
B)  the expected loss from being fired is smaller than the gain from shirking. 
C)  the gain from shirking is positive. 
D)  the expected loss from being fired is zero.

Question 11

If an additional dollar spent on monitoring would reduce shirking by 10 minutes,then the firm will increase the worker's wage by $1 if this caused

Accepted Answer

A)  shirking to increase by less than 10 minutes. 
B)  shirking to decrease by more than 10 minutes. 
C)  shirking to decrease by less than 10 minutes. 
D)  monitoring to become unnecessary. 
A)  shirking to increase by less than 10 minutes. 
B)  shirking to decrease by more than 10 minutes. 
C)  shirking to decrease by less than 10 minutes. 
D)  monitoring to become unnecessary.

Question 12

The outcome of the state of nature effects the payoff to the agent under a

Accepted Answer

A)  fixed-fee contract. 
B)  hire contract. 
C)  contingent contract. 
D)  All of the above. 
A)  fixed-fee contract. 
B)  hire contract. 
C)  contingent contract. 
D)  All of the above.

Question 13

Season ticket holders often purchase their tickets before a season begins.There is often a discount associated with season tickets.Why?

Accepted Answer

A)  Buying season tickets entails risk, which consumers are willing to bear if they are compensated for doing so. 
B)  Buying season tickets is a way of guaranteeing a supply of tickets for the secondary market. 
C)  Selling season tickets entails greater transactions costs which team owners hope to avoid. 
D)  Sports teams are local monopolies. 
A)  Buying season tickets entails risk, which consumers are willing to bear if they are compensated for doing so. 
B)  Buying season tickets is a way of guaranteeing a supply of tickets for the secondary market. 
C)  Selling season tickets entails greater transactions costs which team owners hope to avoid. 
D)  Sports teams are local monopolies.

Question 14

A good salesperson can sell $100,000 worth of goods,while a poor one can sell only $10,000 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 $2,000 or a commission on the sale.Assume risk-neutral salespersons and no opportunistic behavior.Given that the firm wants to distinguish a prospective good salesperson from a poor one,what should be the commission on sales?

Accepted Answer

A)  Commission should be larger than 50%. 
B)  Commission should be larger than 40%. 
C)  Commission should be between 2% and 20%. 
D)  Commission should be smaller than 2%. 
A)  Commission should be larger than 50%. 
B)  Commission should be larger than 40%. 
C)  Commission should be between 2% and 20%. 
D)  Commission should be smaller than 2%.

Question 15

Production efficiency implies that

Accepted Answer

A)  joint profits are maximized. 
B)  joint profits are minimized. 
C)  joint profits are zero. 
D)  joint profits can be increased. 
A)  joint profits are maximized. 
B)  joint profits are minimized. 
C)  joint profits are zero. 
D)  joint profits can be increased.

Question 16

To induce an agent to work hard,a principal may offer the agent a bonus,in other words,an extra payment if a performance target is hit.Suppose that the agent's performance is affected by factors beyond the agent's control,for example umbrellas are demanded more on a rainy day.Under what conditions may the bonus not induce the agent to work harder?

Accepted Answer

A)  The agent is very risk averse. 
B)  The agent is very risk loving. 
C)  The agent is risk neutral. 
D)  The principal is risk neutral. 
A)  The agent is very risk averse. 
B)  The agent is very risk loving. 
C)  The agent is risk neutral. 
D)  The principal is risk neutral.

Question 17

A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until

Accepted Answer

A)  the worker requires no monitoring. 
B)  the worker receives the market wage and requires full-time monitoring. 
C)  the cost of monitoring the worker equals the efficiency wage. 
D)  the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one. 
A)  the worker requires no monitoring. 
B)  the worker receives the market wage and requires full-time monitoring. 
C)  the cost of monitoring the worker equals the efficiency wage. 
D)  the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one.

Question 18

Suppose there is no uncertainty about sales.Firms can avoid hiring lazy workers by

Accepted Answer

A)  offering contingent contracts. 
B)  fixed wage contracts. 
C)  engaging in cheap talk. 
D)  All of the above. 
A)  offering contingent contracts. 
B)  fixed wage contracts. 
C)  engaging in cheap talk. 
D)  All of the above.

Question 19

A contingent contract can create production inefficiency; however,many principals accept this because

Accepted Answer

A)  inefficiency is inevitable. 
B)  monitoring is costless. 
C)  risk is reduced. 
D)  profit will increase as a result. 
A)  inefficiency is inevitable. 
B)  monitoring is costless. 
C)  risk is reduced. 
D)  profit will increase as a result.

Question 20

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.

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

Which of the following would NOT be used by firms to deter shirking?

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

Including an employee representative on the board of directors reduces the possibility of opportunistic employer behavior.

When is a piece-rate contract generally used?

Sue offers to pay Al $50 for each painting of his that she sells in her gallery.Each painting sells for $75.The cost to Al of producing each painting is $55.Which of the following statements is TRUE about this contract?

Explain why checks on principals might be necessary.

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

A firm uses an efficiency wage scheme to deter workers from shirking.A risk-neutral worker will NOT shirk if

If an additional dollar spent on monitoring would reduce shirking by 10 minutes,then the firm will increase the worker's wage by $1 if this caused

The outcome of the state of nature effects the payoff to the agent under a

Season ticket holders often purchase their tickets before a season begins.There is often a discount associated with season tickets.Why?

Production efficiency implies that

A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until

Suppose there is no uncertainty about sales.Firms can avoid hiring lazy workers by

A contingent contract can create production inefficiency; however,many principals accept this because

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

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

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

Which of the following would NOT be used by firms to deter shirking?

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

Including an employee representative on the board of directors reduces the possibility of opportunistic employer behavior.

When is a piece-rate contract generally used?

Sue offers to pay Al $50 for each painting of his that she sells in her gallery.Each painting sells for $75.The cost to Al of producing each painting is $55.Which of the following statements is TRUE about this contract?

Explain why checks on principals might be necessary.

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

A firm uses an efficiency wage scheme to deter workers from shirking.A risk-neutral worker will NOT shirk if

If an additional dollar spent on monitoring would reduce shirking by 10 minutes,then the firm will increase the worker's wage by $1 if this caused

The outcome of the state of nature effects the payoff to the agent under a

Season ticket holders often purchase their tickets before a season begins.There is often a discount associated with season tickets.Why?

Production efficiency implies that

A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until

Suppose there is no uncertainty about sales.Firms can avoid hiring lazy workers by

A contingent contract can create production inefficiency; however,many principals accept this because

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

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