Question 1

Production inefficiency is most likely to occur when the principal has more information about work performance than the agent does.

Accepted Answer

A) True 
 B)False

Question 2

Monitoring is often used by firms in an attempt to decrease

Accepted Answer

A)  shirking. 
B)  piece rates. 
C)  adverse selection. 
D)  signaling. 
A)  shirking. 
B)  piece rates. 
C)  adverse selection. 
D)  signaling.

Question 3

Which of the following workers is most likely to be asked to post a bond?

Accepted Answer

A)  construction contractor 
B)  fast food worker 
C)  sanitation worker 
D)  book author 
A)  construction contractor 
B)  fast food worker 
C)  sanitation worker 
D)  book author

Question 4

Many art galleries keep 60% of the sale price of a painting.However,art galleries do not typically pay the artist while the painting hangs on the wall.This form of contingency contract may be efficient if

Accepted Answer

A)  the artist is less risk averse than the gallery. 
B)  the gallery is less risk averse than the artist. 
C)  the artist is unable to diversify across galleries or paintings. 
D)  the gallery is unable to diversify across artists of paintings. 
A)  the artist is less risk averse than the gallery. 
B)  the gallery is less risk averse than the artist. 
C)  the artist is unable to diversify across galleries or paintings. 
D)  the gallery is unable to diversify across artists of paintings.

Question 5

Suppose the principal offers to share a percentage of the profit with the agent.Such a contract

Accepted Answer

A)  will yield the same income for the agent as a hire contract would. 
B)  is incentive compatible. 
C)  creates a production inefficiency. 
D)  would not be acceptable to any agent. 
A)  will yield the same income for the agent as a hire contract would. 
B)  is incentive compatible. 
C)  creates a production inefficiency. 
D)  would not be acceptable to any agent.

Question 6

Suppose two owners of a store agree to split the profit equally regardless of the number of hours each spends working at the store.As a result,

Accepted Answer

A)  production efficiency is achieved. 
B)  each enjoys only half the marginal benefit of an additional hour working in the store. 
C)  one will work all of the time while the other works zero hours. 
D)  each will work as many hours as if he or she were the sole owner. 
A)  production efficiency is achieved. 
B)  each enjoys only half the marginal benefit of an additional hour working in the store. 
C)  one will work all of the time while the other works zero hours. 
D)  each will work as many hours as if he or she were the sole owner.

Question 7

Profit-sharing contracts are designed to

Accepted Answer

A)  mitigate the moral hazard problem. 
B)  be fair with the workers. 
C)  be used in situations in which shirking is not possible. 
D)  All of the above. 
A)  mitigate the moral hazard problem. 
B)  be fair with the workers. 
C)  be used in situations in which shirking is not possible. 
D)  All of the above.

Question 8

Assume a firm is run as a zero-profit enterprise.Which of the following would be TRUE?

Accepted Answer

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

Question 9

In the presence of asymmetric information with costless monitoring and enforcement,a hire contract results in production efficiency.

Accepted Answer

A) True 
 B)False

Question 10

When shirking at the workplace occurs,increased monitoring of workers is the only effective way to reduce this behavior.

Accepted Answer

A) True 
 B)False

Question 11

Moral hazard occurs when contracts are written in such a way that

Accepted Answer

A)  the interests of agent and principal converge. 
B)  the interests of agent and principal diverge. 
C)  agents will wish to maximize the principal's utility. 
D)  production and risk-bearing efficiency are achieved. 
A)  the interests of agent and principal converge. 
B)  the interests of agent and principal diverge. 
C)  agents will wish to maximize the principal's utility. 
D)  production and risk-bearing efficiency are achieved.

Question 12

Suppose an employer has monitoring devices established so that the probability of an employee being caught while shirking is 0.2.If the gain to the employee from shirking is $1,000,how large a bond will deter shirking?

Accepted Answer

B = 1000/0.2 = $5,000.With a $

Question 13

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

Accepted Answer

A)  between $0 and $20,000 
B)  between $20,000 and $200,000 
C)  greater than $200,000 
D)  zero 
A)  between $0 and $20,000 
B)  between $20,000 and $200,000 
C)  greater than $200,000 
D)  zero

Question 14

The benefit to employers of deferred payments is that

Accepted Answer

A)  adverse selection is eliminated. 
B)  employers cannot engage in any opportunistic behavior. 
C)  these payments raise the cost of being fired, so more monitoring is needed. 
D)  these payments raise the cost of being fired, so less monitoring is needed. 
A)  adverse selection is eliminated. 
B)  employers cannot engage in any opportunistic behavior. 
C)  these payments raise the cost of being fired, so more monitoring is needed. 
D)  these payments raise the cost of being fired, so less monitoring is needed.

Question 15

In the presence of asymmetric information,a piece-rate contract

Accepted Answer

A)  achieves production efficiency. 
B)  can lead to agents producing more output than would occur under a fixed-rent-paid-to-the-principal contract. 
C)  is impossible to write. 
D)  will result in the principal earning all of the profit. 
A)  achieves production efficiency. 
B)  can lead to agents producing more output than would occur under a fixed-rent-paid-to-the-principal contract. 
C)  is impossible to write. 
D)  will result in the principal earning all of the profit.

Question 16

If all firms pay an efficiency wage,then

Accepted Answer

A)  there is no cost to shirking because the shirking worker can receive his high wage at another firm after being caught and fired. 
B)  the macroeconomy would enjoy a prolonged period of near-zero unemployment. 
C)  there is a cost to shirking because the efficiency wage is less than it would have been if only a few firms paid it. 
D)  there is a cost to shirking because the shirking worker will spend a greater time unemployed after being caught and fired. 
A)  there is no cost to shirking because the shirking worker can receive his high wage at another firm after being caught and fired. 
B)  the macroeconomy would enjoy a prolonged period of near-zero unemployment. 
C)  there is a cost to shirking because the efficiency wage is less than it would have been if only a few firms paid it. 
D)  there is a cost to shirking because the shirking worker will spend a greater time unemployed after being caught and fired.

Question 17

In a principal-agent problem,if the contract implies that the more risk-averse agent will bear less risk,we can say that this contract exhibits

Accepted Answer

A)  efficiency in risk-bearing. 
B)  risk sharing is not optimal because the less risk-averse (or risk-neutral) agent should bear none of the risk. 
C)  risk sharing is not optimal because all risk should be transferred to the most risk-averse agent. 
D)  risk sharing is not optimal because risk-neutral agents should face no risk. 
A)  efficiency in risk-bearing. 
B)  risk sharing is not optimal because the less risk-averse (or risk-neutral) agent should bear none of the risk. 
C)  risk sharing is not optimal because all risk should be transferred to the most risk-averse agent. 
D)  risk sharing is not optimal because risk-neutral agents should face no risk.

Question 18

Many professional sports athletes have incentive clauses in their contracts.These indicate that

Accepted Answer

A)  the team owner has asymmetric information. 
B)  the athlete might engage in moral hazard, which the team owner wishes to avoid. 
C)  the athlete might engage in adverse selection, which the team owner wishes to avoid. 
D)  the athlete has stronger negotiators. 
A)  the team owner has asymmetric information. 
B)  the athlete might engage in moral hazard, which the team owner wishes to avoid. 
C)  the athlete might engage in adverse selection, which the team owner wishes to avoid. 
D)  the athlete has stronger negotiators.

Question 19

Sam hires an attorney to present a court case.If Sam wins the case,he will receive some money.This payoff is a function of the attorney's hours and which judge is assigned the case that day.Judge A is very understanding toward people in Sam's position,but judge B is very harsh toward people like Sam.Is it possible for Sam to get the attorney to deliver the optimal amount of effort and make the attorney bear all of the risk?

Accepted Answer

Yes.If Sam accepts a fixed payment from

Question 20

What is one potential problem with nationalized health care?

Accepted Answer

A)  It might not be efficient in risk bearing. 
B)  It is guaranteed to solve the principal-agent problem. 
C)  It would be efficient in risk bearing. 
D)  It might cost too much. 
A)  It might not be efficient in risk bearing. 
B)  It is guaranteed to solve the principal-agent problem. 
C)  It would be efficient in risk bearing. 
D)  It might cost too much.

Production inefficiency is most likely to occur when the principal has more information about work performance than the agent does.

Monitoring is often used by firms in an attempt to decrease

Which of the following workers is most likely to be asked to post a bond?

Many art galleries keep 60% of the sale price of a painting.However,art galleries do not typically pay the artist while the painting hangs on the wall.This form of contingency contract may be efficient if

Suppose the principal offers to share a percentage of the profit with the agent.Such a contract

Suppose two owners of a store agree to split the profit equally regardless of the number of hours each spends working at the store.As a result,

Profit-sharing contracts are designed to

Assume a firm is run as a zero-profit enterprise.Which of the following would be TRUE?

In the presence of asymmetric information with costless monitoring and enforcement,a hire contract results in production efficiency.

When shirking at the workplace occurs,increased monitoring of workers is the only effective way to reduce this behavior.

Moral hazard occurs when contracts are written in such a way that

Suppose an employer has monitoring devices established so that the probability of an employee being caught while shirking is 0.2.If the gain to the employee from shirking is $1,000,how large a bond will deter shirking?

The benefit to employers of deferred payments is that

In the presence of asymmetric information,a piece-rate contract

If all firms pay an efficiency wage,then

In a principal-agent problem,if the contract implies that the more risk-averse agent will bear less risk,we can say that this contract exhibits

Many professional sports athletes have incentive clauses in their contracts.These indicate that

What is one potential problem with nationalized health care?

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

Production inefficiency is most likely to occur when the principal has more information about work performance than the agent does.

Monitoring is often used by firms in an attempt to decrease

Which of the following workers is most likely to be asked to post a bond?

Many art galleries keep 60% of the sale price of a painting.However,art galleries do not typically pay the artist while the painting hangs on the wall.This form of contingency contract may be efficient if

Suppose the principal offers to share a percentage of the profit with the agent.Such a contract

Suppose two owners of a store agree to split the profit equally regardless of the number of hours each spends working at the store.As a result,

Profit-sharing contracts are designed to

Assume a firm is run as a zero-profit enterprise.Which of the following would be TRUE?

In the presence of asymmetric information with costless monitoring and enforcement,a hire contract results in production efficiency.

When shirking at the workplace occurs,increased monitoring of workers is the only effective way to reduce this behavior.

Moral hazard occurs when contracts are written in such a way that

Suppose an employer has monitoring devices established so that the probability of an employee being caught while shirking is 0.2.If the gain to the employee from shirking is $1,000,how large a bond will deter shirking?

The benefit to employers of deferred payments is that

In the presence of asymmetric information,a piece-rate contract

If all firms pay an efficiency wage,then

In a principal-agent problem,if the contract implies that the more risk-averse agent will bear less risk,we can say that this contract exhibits

Many professional sports athletes have incentive clauses in their contracts.These indicate that

What is one potential problem with nationalized health care?

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