Question 1

As the probability of detecting shirking increases,the size of the bond necessary to deter shirking

Accepted Answer

A)  also increases. 
B)  stays the same. 
C)  decreases. 
D)  increases at an exponential rate. 
A)  also increases. 
B)  stays the same. 
C)  decreases. 
D)  increases at an exponential rate.

Question 2

In NASCAR,a race winner might win,say,$500,000,whereas second place wins $450,000.Why might NASCAR have a 10% reduction in prize money from first and second place?

Accepted Answer

A)  To ensure that there is enough money to pay those who finish near last. 
B)  To motivate drivers to take risks they might not otherwise take. 
C)  To motivate drivers to not take risks they might otherwise take. 
D)  NASCAR is a cartel. 
A)  To ensure that there is enough money to pay those who finish near last. 
B)  To motivate drivers to take risks they might not otherwise take. 
C)  To motivate drivers to not take risks they might otherwise take. 
D)  NASCAR is a cartel.

Question 3

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

Question 4

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is efficiency in risk bearing assured?

Accepted Answer

A)  The lawyer is paid by the hour. 
B)  The lawyer receives a share of the settlement. 
C)  The lawyer receives a fixed fee. 
D)  It is impossible to determine without the degree of risk aversion for each. 
A)  The lawyer is paid by the hour. 
B)  The lawyer receives a share of the settlement. 
C)  The lawyer receives a fixed fee. 
D)  It is impossible to determine without the degree of risk aversion for each.

Question 5

An employee gains $500 from shirking.Thus,to deter shirking,the employer makes employees post a bond equal to $1,000,and installs monitoring devices to detect shirking.What is the probability that these devices can detect shirking?

Accepted Answer

A)  30% 
B)  100% 
C)  50% 
D)  95% 
A)  30% 
B)  100% 
C)  50% 
D)  95%

Question 6

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is production efficiency assured?

Accepted Answer

A)  The lawyer is paid by the hour. 
B)  The lawyer receives a share of the settlement. 
C)  The lawyer receives a fixed fee. 
D)  The lawyer pays the client a fee for the right to the entire settlement. 
A)  The lawyer is paid by the hour. 
B)  The lawyer receives a share of the settlement. 
C)  The lawyer receives a fixed fee. 
D)  The lawyer pays the client a fee for the right to the entire settlement.

Question 7

We can say that a contract is able to prevent moral hazard when

Accepted Answer

A)  it eliminates production inefficiencies due to moral hazard without shifting risk to risk-averse people. 
B)  it eliminates production inefficiencies due to moral hazard without shifting risk to risk-loving people. 
C)  it shifts risk to risk-loving people. 
D)  it eliminates production inefficiencies due to moral hazard and shifts risk to risk-averse people. 
A)  it eliminates production inefficiencies due to moral hazard without shifting risk to risk-averse people. 
B)  it eliminates production inefficiencies due to moral hazard without shifting risk to risk-loving people. 
C)  it shifts risk to risk-loving people. 
D)  it eliminates production inefficiencies due to moral hazard and shifts risk to risk-averse people.

Question 8

One way to prevent workers from shirking is to

Accepted Answer

A)  hire only workers who are predisposed toward shirking. 
B)  hire only workers who are predisposed toward not shirking. 
C)  reduce monitoring to zero. 
D)  pay workers a fixed fee. 
A)  hire only workers who are predisposed toward shirking. 
B)  hire only workers who are predisposed toward not shirking. 
C)  reduce monitoring to zero. 
D)  pay workers a fixed fee.

Question 9

A good salesperson can sell $500,000 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 $10,000 or a 10% commission.Assuming risk-neutral salespersons and no opportunistic behavior,can the firm determine a prospective good salesperson from a poor one?

Accepted Answer

A)  Yes, because a poor salesperson will always choose the fixed salary. 
B)  Yes, because a good salesperson will always choose the fixed salary. 
C)  No, because a poor salesperson is indifferent between the two contracts. 
D)  No, because a good salesperson is indifferent between the two contracts. 
A)  Yes, because a poor salesperson will always choose the fixed salary. 
B)  Yes, because a good salesperson will always choose the fixed salary. 
C)  No, because a poor salesperson is indifferent between the two contracts. 
D)  No, because a good salesperson is indifferent between the two contracts.

Question 10

Suppose employees pay a bond of $1,000 to an employer.The gain from shirking is $400.Monitoring devices have been installed so that there is a 50% chance of being caught if you are shirking.The company is considering the installation of additional monitoring devices to increase the chance of catching a shirker to 100%.They feel this is needed to deter all shirking.What is your recommendation to the company? Explain.

Accepted Answer

Shirking is already deterred;

Question 11

In professional golf,a tournament winner might win,say,$1 million,whereas second place wins only $600,000.Why might golf have a 40% reduction in prize money from first and second place?

Accepted Answer

A)  To ensure that there is enough money to pay those who finish near last. 
B)  To motivate golfers to take risks they might not otherwise take. 
C)  To motivate golfers to not take risks they might otherwise take. 
D)  The Professional Golfers Association is a cartel. 
A)  To ensure that there is enough money to pay those who finish near last. 
B)  To motivate golfers to take risks they might not otherwise take. 
C)  To motivate golfers to not take risks they might otherwise take. 
D)  The Professional Golfers Association is a cartel.

Question 12

In a store that sells souvenirs,suppose an agent receives a $1 commission for each unit sold,and the principal receives the residual profit.As a result,

Accepted Answer

A)  joint profit is maximized. 
B)  the agent will sell until the principal's marginal cost equals $1. 
C)  no agent would enter into such a contract. 
D)  the agent wishes to sell as many units as he can. 
A)  joint profit is maximized. 
B)  the agent will sell until the principal's marginal cost equals $1. 
C)  no agent would enter into such a contract. 
D)  the agent wishes to sell as many units as he can.

Question 13

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 14

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 15

Suppose the probability of an employee being caught shirking,q,is a function of the employer's monitoring,M,such that q = M/100.If workers must put up a $1,000 bond and the gain to each worker from shirking is $100,what is the employer's optimal level of monitoring that is just sufficient to discourage shirking?

Accepted Answer

Workers are deterred from shir

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 efficiency wage paid by this firm is $7,000.What is the industry ongoing wage?

Accepted Answer

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

Question 17

Assume a lawyer signs a contingency fee contract with a plaintiff.The case ends up settling for $1 million,of which the plaintiff received $800,000.It is obvious this contract was efficient.

Accepted Answer

A)  True, the plaintiff received some money. 
B)  False, it is not clear whether another lawyer would have settled for more. 
C)  False, it is not clear whether the plaintiff's lawyer is very smart. 
D)  True, the plaintiff and lawyer reached an agreement and both lived up to their end of the agreement. 
A)  True, the plaintiff received some money. 
B)  False, it is not clear whether another lawyer would have settled for more. 
C)  False, it is not clear whether the plaintiff's lawyer is very smart. 
D)  True, the plaintiff and lawyer reached an agreement and both lived up to their end of the agreement.

Question 18

Rents for stores at shopping malls are usually tied to the profits of the store.Comment on how this arrangement affects the mall owner's income versus a fixed rent.

Accepted Answer

It is likely that such an arrangement re

Question 19

With full information any contract will lead to production efficiency.

Accepted Answer

A) True 
 B)False

Question 20

In 2008,foreclosures reached a record high.Which of the following is NOT a possible reason for foreclosures?

Accepted Answer

A)  Many mortgages were initiated without a down payment. 
B)  Many mortgages were initiated on secondary and investment homes. 
C)  Some mortgages were adjustable rate mortgages which might have dramatically increased monthly payments for some. 
D)  Property values were increasing too fast. 
A)  Many mortgages were initiated without a down payment. 
B)  Many mortgages were initiated on secondary and investment homes. 
C)  Some mortgages were adjustable rate mortgages which might have dramatically increased monthly payments for some. 
D)  Property values were increasing too fast.

As the probability of detecting shirking increases,the size of the bond necessary to deter shirking

In NASCAR,a race winner might win,say,$500,000,whereas second place wins $450,000.Why might NASCAR have a 10% reduction in prize money from first and second place?

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is efficiency in risk bearing assured?

An employee gains $500 from shirking.Thus,to deter shirking,the employer makes employees post a bond equal to $1,000,and installs monitoring devices to detect shirking.What is the probability that these devices can detect shirking?

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is production efficiency assured?

We can say that a contract is able to prevent moral hazard when

One way to prevent workers from shirking is to

In professional golf,a tournament winner might win,say,$1 million,whereas second place wins only $600,000.Why might golf have a 40% reduction in prize money from first and second place?

In a store that sells souvenirs,suppose an agent receives a $1 commission for each unit sold,and the principal receives the residual profit.As a result,

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

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

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 efficiency wage paid by this firm is $7,000.What is the industry ongoing wage?

Assume a lawyer signs a contingency fee contract with a plaintiff.The case ends up settling for $1 million,of which the plaintiff received $800,000.It is obvious this contract was efficient.

Rents for stores at shopping malls are usually tied to the profits of the store.Comment on how this arrangement affects the mall owner's income versus a fixed rent.

With full information any contract will lead to production efficiency.

In 2008,foreclosures reached a record high.Which of the following is NOT a possible reason for foreclosures?

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

As the probability of detecting shirking increases,the size of the bond necessary to deter shirking

In NASCAR,a race winner might win,say,$500,000,whereas second place wins $450,000.Why might NASCAR have a 10% reduction in prize money from first and second place?

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is efficiency in risk bearing assured?

An employee gains $500 from shirking.Thus,to deter shirking,the employer makes employees post a bond equal to $1,000,and installs monitoring devices to detect shirking.What is the probability that these devices can detect shirking?

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is production efficiency assured?

We can say that a contract is able to prevent moral hazard when

One way to prevent workers from shirking is to

In professional golf,a tournament winner might win,say,$1 million,whereas second place wins only $600,000.Why might golf have a 40% reduction in prize money from first and second place?

In a store that sells souvenirs,suppose an agent receives a $1 commission for each unit sold,and the principal receives the residual profit.As a result,

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

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

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 efficiency wage paid by this firm is $7,000.What is the industry ongoing wage?

Assume a lawyer signs a contingency fee contract with a plaintiff.The case ends up settling for $1 million,of which the plaintiff received $800,000.It is obvious this contract was efficient.

Rents for stores at shopping malls are usually tied to the profits of the store.Comment on how this arrangement affects the mall owner's income versus a fixed rent.

With full information any contract will lead to production efficiency.

In 2008,foreclosures reached a record high.Which of the following is NOT a possible reason for foreclosures?

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