Question 1

Wage reduction policies are less common than layoffs because

Accepted Answer

A)  workers never prefer wage reduction policies. 
B)  workers always trust the firm to tell the truth. 
C)  of asymmetric information. 
D)  of adverse selection problems. 
A)  workers never prefer wage reduction policies. 
B)  workers always trust the firm to tell the truth. 
C)  of asymmetric information. 
D)  of adverse selection problems.

Question 2

Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will receive a share of the settlement if the plaintiff wins.Under this contract,

Accepted Answer

A)  production efficiency cannot be achieved. 
B)  the client bears all of the risk. 
C)  the lawyer bears all of the risk. 
D)  the risk is shared. 
A)  production efficiency cannot be achieved. 
B)  the client bears all of the risk. 
C)  the lawyer bears all of the risk. 
D)  the risk is shared.

Question 3

If a professional sports athlete signs a new contract which defers compensation until years after she is retired,she is signaling

Accepted Answer

A)  that she does not plan to shirk in the future, regardless of whether she did so in the past. 
B)  that she did shirk and she will do so in the future. 
C)  that she did shirk but won't do so in the future. 
D)  that she didn't shirk and she won't do so in the future. 
A)  that she does not plan to shirk in the future, regardless of whether she did so in the past. 
B)  that she did shirk and she will do so in the future. 
C)  that she did shirk but won't do so in the future. 
D)  that she didn't shirk and she won't do so in the future.

Question 4

Explain how more than one possible state of nature affects contract choices.

Accepted Answer

The uncertainty of the state o

Question 5

Efficiency in risk bearing implies that

Accepted Answer

A)  risk is completely eliminated. 
B)  the least risk-averse party bears most of the risk. 
C)  the most risk-averse party bears most of the risk. 
D)  all of the risk is borne by just one of the parties regardless of the degree of risk aversion. 
A)  risk is completely eliminated. 
B)  the least risk-averse party bears most of the risk. 
C)  the most risk-averse party bears most of the risk. 
D)  all of the risk is borne by just one of the parties regardless of the degree of risk aversion.

Question 6

A deferred payment scheme is more likely to be accepted by a worker if

Accepted Answer

A)  the firm has a reputation of not firing senior employees to save pension costs. 
B)  the worker is very young. 
C)  the worker is very old. 
D)  None of the above. 
A)  the firm has a reputation of not firing senior employees to save pension costs. 
B)  the worker is very young. 
C)  the worker is very old. 
D)  None of the above.

Question 7

Describe the characteristics of an efficient contract between a principal and an agent.

Accepted Answer

An efficient contract is efficient in pr

Question 8

Explain why a firm may hire managers to operate outlets near the firm's headquarters,but may sell franchise rights for the outlets located greater distances from the headquarters.(With a franchise,the firm sells a brand name and a method of doing business to someone who then owns and operates the outlet.)

Accepted Answer

To avoid moral hazard problems,the firm

Question 9

In the presence of asymmetric information,production efficiency is assured when the principal and agent share the profit.

Accepted Answer

A) True 
 B)False

Question 10

If a firm hires lazy employees,

Accepted Answer

A)  it must pay them differently or hard-working employees will engage in moral hazard. 
B)  it must pay them more or hard-working employees will engage in moral hazard. 
C)  it must fire them before their laziness spreads to hard-working employees. 
D)  the lazy employees make hard-working employees look good. 
A)  it must pay them differently or hard-working employees will engage in moral hazard. 
B)  it must pay them more or hard-working employees will engage in moral hazard. 
C)  it must fire them before their laziness spreads to hard-working employees. 
D)  the lazy employees make hard-working employees look good.

Question 11

Workers can reduce the chance of an employer lying by

Accepted Answer

A)  obtaining more information about the firm's performance. 
B)  having a representative on the board of directors. 
C)  requiring that employers share the cost of an economic downtown. 
D)  All of the above. 
A)  obtaining more information about the firm's performance. 
B)  having a representative on the board of directors. 
C)  requiring that employers share the cost of an economic downtown. 
D)  All of the above.

Question 12

A good salesperson can sell $200,000 worth of goods,while a poor one can sell only a smaller amount 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 $20,000 or a 20% commission.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 sales amount of a poor salesperson?

Accepted Answer

A)  more than $150,000 
B)  less than $100,000 
C)  more than $100,000 
D)  $100,000 
A)  more than $150,000 
B)  less than $100,000 
C)  more than $100,000 
D)  $100,000

Question 13

If information is asymmetric,explain why the hire contract is not efficient in production and a moral hazard exists,but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem.

Accepted Answer

With the hire contract,the agent has no

Question 14

Season tickets entail a certain amount of risk due to unpredictable team quality,injuries,weather,and so forth.Who is most likely to purchase season tickets?

Accepted Answer

A)  Sally, who is a rabid fan and is not wealthy 
B)  Jim, who is a rabid fan and is risk neutral 
C)  Roger, who is a rabid fan but is risk averse 
D)  Jenn, who is a fan and is very wealthy 
A)  Sally, who is a rabid fan and is not wealthy 
B)  Jim, who is a rabid fan and is risk neutral 
C)  Roger, who is a rabid fan but is risk averse 
D)  Jenn, who is a fan and is very wealthy

Question 15

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 and 20% commission.Assuming risk-neutral salespersons and no opportunistic behavior,what level must the fixed salary be so that the firm can distinguish a prospective good salesperson from a poor one,and thereby avoid hiring a poor one?

Accepted Answer

Under commission,a good salesperson will

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.The industry ongoing wage is $3,000.The efficiency wage paid by this firm is $8,000.What is this worker's reservation wage?

Accepted Answer

A)  $400 
B)  $500 
C)  $1,000 
D)  $1,500 
A)  $400 
B)  $500 
C)  $1,000 
D)  $1,500

Question 17

In the presence of asymmetric information,a contingent contract

Accepted Answer

A)  achieves production efficiency. 
B)  can lead to opportunistic behavior on the part of the agent. 
C)  is impossible to write. 
D)  will result in the principal earning all of the profit. 
A)  achieves production efficiency. 
B)  can lead to opportunistic behavior on the part of the agent. 
C)  is impossible to write. 
D)  will result in the principal earning all of the profit.

Question 18

In the presence of asymmetric information,a hire contract

Accepted Answer

A)  achieves production efficiency. 
B)  can lead to opportunistic behavior on the part of the agent. 
C)  is impossible to write. 
D)  will result in the principal earning all of the profit. 
A)  achieves production efficiency. 
B)  can lead to opportunistic behavior on the part of the agent. 
C)  is impossible to write. 
D)  will result in the principal earning all of the profit.

Question 19

Sam is suing someone in court for $10,000.The probability that Sam will lose the case is 1/h where h is the number of hours that Sam's attorney works on the case.The lawyer charges $500 per hour if he is to be paid hourly,or he requests 20% of the settlement if he is to be paid on a contingency basis.Assuming both Sam and the attorney are risk-neutral wealth maximizers,is either contract efficient?

Accepted Answer

For a per hour contract,first determine

Question 20

Under deferred compensation packages,

Accepted Answer

A)  a moral hazard occurs if a firms fires a good worker before the worker receives her deferred compensation. 
B)  a moral hazard occurs if workers decide not to shirk so as to receive the deferred compensation. 
C)  moral hazards are avoided. 
D)  workers' wages are below their marginal revenue product as they near retirement. 
A)  a moral hazard occurs if a firms fires a good worker before the worker receives her deferred compensation. 
B)  a moral hazard occurs if workers decide not to shirk so as to receive the deferred compensation. 
C)  moral hazards are avoided. 
D)  workers' wages are below their marginal revenue product as they near retirement.

Wage reduction policies are less common than layoffs because

Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will receive a share of the settlement if the plaintiff wins.Under this contract,

If a professional sports athlete signs a new contract which defers compensation until years after she is retired,she is signaling

Explain how more than one possible state of nature affects contract choices.

Efficiency in risk bearing implies that

A deferred payment scheme is more likely to be accepted by a worker if

Describe the characteristics of an efficient contract between a principal and an agent.

In the presence of asymmetric information,production efficiency is assured when the principal and agent share the profit.

If a firm hires lazy employees,

Workers can reduce the chance of an employer lying by

If information is asymmetric,explain why the hire contract is not efficient in production and a moral hazard exists,but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem.

Season tickets entail a certain amount of risk due to unpredictable team quality,injuries,weather,and so forth.Who is most likely to purchase season tickets?

A firm uses an efficiency wage scheme to deter workers from shirking,which is detected 10% of the times.Suppose a risk-neutral worker.The industry ongoing wage is $3,000.The efficiency wage paid by this firm is $8,000.What is this worker's reservation wage?

In the presence of asymmetric information,a contingent contract

In the presence of asymmetric information,a hire contract

Under deferred compensation packages,

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

Wage reduction policies are less common than layoffs because

Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will receive a share of the settlement if the plaintiff wins.Under this contract,

If a professional sports athlete signs a new contract which defers compensation until years after she is retired,she is signaling

Explain how more than one possible state of nature affects contract choices.

Efficiency in risk bearing implies that

A deferred payment scheme is more likely to be accepted by a worker if

Describe the characteristics of an efficient contract between a principal and an agent.

In the presence of asymmetric information,production efficiency is assured when the principal and agent share the profit.

If a firm hires lazy employees,

Workers can reduce the chance of an employer lying by

If information is asymmetric,explain why the hire contract is not efficient in production and a moral hazard exists,but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem.

Season tickets entail a certain amount of risk due to unpredictable team quality,injuries,weather,and so forth.Who is most likely to purchase season tickets?

A firm uses an efficiency wage scheme to deter workers from shirking,which is detected 10% of the times.Suppose a risk-neutral worker.The industry ongoing wage is $3,000.The efficiency wage paid by this firm is $8,000.What is this worker's reservation wage?

In the presence of asymmetric information,a contingent contract

In the presence of asymmetric information,a hire contract

Under deferred compensation packages,

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