Question 1

If the principal has full information,production efficiency without supervision can occur with
A)a fixed-fee rental contract.
B)a profit-sharing contract.
C)an incentive-compatible contract.
D)All of the above.

Accepted Answer

Production efficiency without supervision can occur with all the mentioned contracts (a fixed-fee rental contract, a profit-sharing contract, and an incentive-compatible contract) if the principal has full information. This is because full information allows the principal to design contracts that align the agent's interests with their own, ensuring that the agent acts in the most efficient manner possible without the need for supervision.

Question 2

The market demand for MP3 player is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $10.If he receives $12 for each MP3 player he sells from the store owner and the store owner controls the quantity of MP3's available for sale,then
A)40 MP3 players will be sold.
B)joint profit is $798.
C)joint profit will be maximized.
D)Nick will sell as many as he can.

Accepted Answer

The answer of The market demand for MP3 player is...

Question 3

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

The answer of Sam is suing someone in court for...

Question 4

Jacko's rock band is putting out a new CD with its music label.The contract between the band and the label specifies that the band receive 25% of the gross revenues plus another $10,000 up front.The record label projects the demand for the album
p = 50 - 0.003Q
where p is the price per CD (in $)and Q is the number of CDs demanded.The cost (not including the band's salary)of producing the CD is constant at $5 per disc.
a.Compute the joint-profit-maximizing price and quantity.
b.Compute the profit maximizing price that the label will wish to set.
c.What price will Jacko want his band's CD sold for? (Assume he only cares about money earned from the CDs. )

Accepted Answer

The answer of Jacko's rock band is putting out a...

Question 5

With full information,any contract will lead to production efficiency.

Accepted Answer

A hire or revenue sharing contract will not provide the incentives for the agent to maximize joint profit.

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?
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.

Accepted Answer

The answer of Sue offers to pay Al $50 for...

Question 7

Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will be paid a fixed fee.Under this contract,
A)production efficiency is 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.

Accepted Answer

In a fixed fee contract, the client bears all of the risk because regardless of the outcome of the case, the lawyer will still receive the same fixed fee. This means that if the case takes longer than expected or if there are unexpected complications, the client will not have to pay any additional fees but the lawyer will still have to put in the extra time and effort. This can lead to the lawyer not putting in enough effort or cutting corners since there is no incentive to work harder. Furthermore, the fixed fee may not accurately reflect the amount of work that will actually go into the case, which can result in the lawyer either overworking and undercharging, or underworking and overcharging.

Question 8

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

Accepted Answer

In the presence of asymmetric information, a piece-rate contract can incentivize agents to produce more output than they would under a fixed-rent-paid-to-the-principal contract. This is because the agent bears the risk of not earning enough to cover the fixed rent under the latter contract, whereas the piece-rate contract offers the potential for higher earnings with greater effort. While a piece-rate contract does not necessarily achieve production efficiency or result in the principal earning all of the profit, it is not impossible to write.

Question 9

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $10.If he signed a fixed-fee rental contract with the store owner and pays $400 as the rent,
A)Nick will sell 20 MP3 players.
B)Nick will sell 30 MP3 players.
C)Nick will sell 40 MP3 players.
D)Nick will sell 50 MP3 players.

Accepted Answer

To find the profit-maximizing quantity, we need to set marginal revenue (MR) equal to marginal cost (MC). MR is the change in revenue from selling one more unit, so it is the derivative of the demand function: MR = d(pq)/dq = p + q(dp/dq) = 50 - Q. MC is given as $10.
Setting MR = MC, we get:
50 - Q = 10
Q = 40
Thus, Nick should sell 40 MP3 players to maximize his profit. We can confirm this by calculating his profit at this quantity:
Total revenue = pQ = (50 - 0.5Q)Q = 50Q - 0.5Q^2 = 50(40) - 0.5(40)^2 = $1400
Total cost = rent + variable cost = $400 + $10(40) = $800
Profit = total revenue - total cost = $600
Selling any other quantity will result in a lower profit.

Question 10

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

The answer of If information is asymmetric,explain why the hire...

Question 11

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

The answer of Rents for stores at shopping malls are...

Question 12

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,
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.

Accepted Answer

Since the owners are splitting the profit equally regardless of the hours worked, each owner only gets half the marginal benefit of additional hours worked. This can lead to a situation where one owner may choose to work fewer hours, knowing that they will still get half the profit regardless.

Question 13

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

Accepted Answer

Since the agent faces full marginal cost but receives only a fraction of the marginal benefit,joint profit is not achieved.

Question 14

In the presence of asymmetric information,a contingent contract
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.

Accepted Answer

In the presence of asymmetric information, where one party has more information than the other, a contingent contract can create opportunities for the agent to behave opportunistically and not fulfill their end of the contract. This may result in a principal-agent problem and lead to suboptimal outcomes.

Question 15

In the presence of asymmetric information,the only contract that results in production efficiency and no moral hazard is the one in which
A)the agent receives a fixed fee.
B)the principal receives a fixed rent.
C)profit is shared.
D)revenue is shared.

Accepted Answer

The answer of In the presence of asymmetric information,the only...

Question 16

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell an MP3 player is $12.If he receives 60% of the MP3 sales revenue,then
A)Nick will sell 38 MP3 players.
B)Nick will sell 50 MP3 players.
C)Nick will receive $270 as profit.
D)total profit is $342.

Accepted Answer

The answer of The market demand for MP3 players is...

Question 17

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

Accepted Answer

By sharing a percentage of the profit, the principal aligns the agent's incentives with their own, making the contract incentive compatible. This can lead to better effort and increased productivity. However, it may also create a production inefficiency if the agent focuses too heavily on maximizing their share of the profit rather than producing the best possible outcome for the principal.

Question 18

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for an MP3 player is $10.If Nick receives 60% of the total profit,then
A)Nick will produce 50 MP3 players.
B)Nick receives $500 as profit.
C)total profit is $800.
D)the efficiency in production is not achieved.

Accepted Answer

To find the optimal quantity to produce, we need to set marginal cost equal to marginal revenue, which is the derivative of the demand equation: 
MC = MR = d(pQ)/dQ = p + Q(dp/dQ) 
10 = (50 - 0.5Q) + Q(-0.5) -> Q = 80 
So producing 80 MP3 players will give us the maximum profit. 
Total revenue = pQ = (50 - 0.5Q)Q = 2000 - 0.5Q^2 
Total cost = MC(Q) * Q = 10Q = 800 
Total profit = TR - TC = 1200 - 800 = 400 
Nick receives 60% of the total profit, so he gets $240. 
Therefore, the correct answer is C.

Question 19

The market demand for MP3 player is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $10.If he signed a fixed-fee rental contract with the store owner and pays $1000 as the rent,
A)Nick will sell 20 MP3 players.
B)Nick will sell 40 MP3 players.
C)Nick will sell 50 MP3 players.
D)Nick will not sign the contract.

Accepted Answer

The answer of The market demand for MP3 player is...

Question 20

In the presence of asymmetric information,a hire contract
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.

Accepted Answer

Asymmetric information occurs when one party in a transaction has more information than the other. In a hire contract, the principal (employer) may not have complete information about the ability and effort levels of the agent (employee). This can lead to opportunistic behavior by the agent, such as shirking or misrepresenting their skills, which can result in lower production efficiency.

Quiz 19: Contracts and Moral Hazards

If the principal has full information,production efficiency without supervision can occur with

The market demand for MP3 player is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $10.If he receives $12 for each MP3 player he sells from the store owner and the store owner controls the quantity of MP3's available for sale,then

With full information,any contract will lead to production efficiency.

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?

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

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

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $10.If he signed a fixed-fee rental contract with the store owner and pays $400 as the rent,

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.

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.

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,

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

In the presence of asymmetric information,a contingent contract

In the presence of asymmetric information,the only contract that results in production efficiency and no moral hazard is the one in which

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell an MP3 player is $12.If he receives 60% of the MP3 sales revenue,then

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

The market demand for MP3 players is p = 50 - 0.5Q,and the marginal cost for an MP3 player is $10.If Nick receives 60% of the total profit,then

The market demand for MP3 player is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $10.If he signed a fixed-fee rental contract with the store owner and pays $1000 as the rent,

In the presence of asymmetric information,a hire contract