Monitoring is often used by firms in an attempt to decrease
A) shirking.
B) piece rates.
C) adverse selection.
D) signaling.
QUESTION 2If a firm has established monitoring devices that have a 50 chance of detecting shirking, and an employee gains 5,000 from shirking, the employer can deter shirking by having employees post a bond equal to
A) 2,500.
B) 5,000.
C) 10,000.
D) 50,000.
QUESTION 3Sarah's demand for routine medical visits is q = 10 - 0.2p when she is healthy and q = 20 - 0.2p when she is sick. Medical visits cost 50 each if Sarah has no medical insurance. She is sick 20 of the time. Sarah is considering two different insurance plans. One offers free medical visits; the other plan costs less up front but requires that Sarah pay 5 per medical visit. Compare the two plans in terms of the trade-off between risk and moral hazard.
What will be an ideal response?
QUESTION 4Sam 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?
What will be an ideal response?
QUESTION 5If 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.
What will be an ideal response?
QUESTION 6Rents 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.
What will be an ideal response?
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