When does it make sense to offer a worker a piece-rate contract? What will be an ideal response? ANSWER Piece-rate contracts require that a worker’s output can be measured, that the right behavior is elicited, and that workers can be persuaded to accept the contract. Workers like teachers or managers, whose output is difficult […]
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. ANSWER B
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. ANSWER D
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 […]
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 […]
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. ANSWER B
Which of the following is NOT a difficulty with using a piece-rate contract? A) measuring output B) eliciting the desired behavior C) gaining worker acceptance D) workers taking too much time to achieve a certain task ANSWER D
Refer to the demand and supply equations. At a price of $35, there will be ________. Fill in the blank(s) with correct word ANSWER Qd = 80 – 2 (35 ) = 10 units Qs = – 10 + 4 (35 ) = 130 units Thus, at a price of $35 which is above […]
In which of the following contracts is the agent’s payment unaffected by his performance? A) fixed-fee contract B) hire contract C) contingent contract D) sharing contract ANSWER A
The moral hazard associated with managers whose productivity is difficult to quantify can be decreased with A) piece-rate contracts. B) year-end bonuses. C) decreased wages. D) adverse selection. ANSWER B
