Question 1

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 2

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 3

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

Accepted Answer

The uncertainty of the state o

Question 4

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 5

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 6

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 7

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.

Question 8

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 9

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

Accepted Answer

A) True 
 B)False

Question 10

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 11

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 12

Suppose a plaintiff hires a lawyer to represent her in a court case.To which of the following contracts would a highly risk-averse plaintiff agree?

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 13

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 14

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 15

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 16

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 17

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 $

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

In the presence of asymmetric information,a contingent contract

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

The benefit to employers of deferred payments is that

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

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

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

One way to prevent workers from shirking is to

If a firm hires lazy employees,

Suppose a plaintiff hires a lawyer to represent her in a court case.To which of the following contracts would a highly risk-averse plaintiff agree?

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,

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

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?

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

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

In the presence of asymmetric information,a contingent contract

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

The benefit to employers of deferred payments is that

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

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

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

One way to prevent workers from shirking is to

If a firm hires lazy employees,

Suppose a plaintiff hires a lawyer to represent her in a court case.To which of the following contracts would a highly risk-averse plaintiff agree?

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,

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

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?

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