Suppose employees pay a bond of 1,000 to an employer. The gain from shirking is 400. Monitoring ...

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.
 
  What will be an ideal response?

QUESTION 2

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?
 
  What will be an ideal response?

QUESTION 3

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?
 
  What will be an ideal response?

QUESTION 4

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.)
 
  What will be an ideal response?

QUESTION 5

When shirking at the workplace occurs, increased monitoring of workers is the only effective way to reduce this behavior.
 
  Indicate whether the statement is true or false

QUESTION 6

A major problem inherent in posting bonds is that
 
  A) workers are not trustworthy.
  B) workers may not have enough wealth to post them.
  C) workers cannot find co-signers.
  D) All of the above.

QUESTION 7

A firm uses an efficiency wage scheme to deter workers from shirking. Suppose a risk-neutral worker that has a reservation wage of 1000. The industry ongoing wage is 2,000. The efficiency wage paid by this firm is 7,000. What is this firm's shirking detection rate?
 
  A) 5
  B) 20
  C) 10
  D) 25