Test Bank For - (All Chapters 1-20, 100% Original Verified, A+ ...

Test Bank For Microeconomics 9 th Global Edition By Jeffrey Perloff

(All Chapters 1-20, 100% Original Verified, A+ Grade)

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1 Copyright © 2024 Pearson Education Ltd. All Rights Reserved.Microeconomics, 9e, Global Edition (Perloff) Chapter 20 Contracts and Moral Hazards

20.1 The Principal-Agent Problem

1) In which of the following contracts is the agent's payment unaffected by his performance?

• fixed-fee contract
• hire contract
• contingent contract
• sharing contract

Answer: A

Section: The Principal-Agent Problem

Question Status: Old

AACSB: Analytic thinking

2) The outcome of the state of nature effects the payoff to the agent under a

• fixed-fee contract.
• hire contract.
• contingent contract.
• All of the above.

Answer: C

Section: The Principal-Agent Problem

Question Status: Old

AACSB: Analytic thinking

3) Moral hazard occurs when contracts are written in such a way that

• the interests of agent and principal converge.
• the interests of agent and principal diverge.
• agents will wish to maximize the principal's utility.
• production and risk-bearing efficiency are achieved.

Answer: B

Section: The Principal-Agent Problem

Question Status: Old

AACSB: Analytic thinking

4) Efficiency in risk bearing implies that

• risk is completely eliminated.
• the least risk-averse party bears most of the risk.
• the most risk-averse party bears most of the risk.
• all of the risk is borne by just one of the parties regardless of the degree of risk aversion.

Answer: B

Section: The Principal-Agent Problem

Question Status: Old

AACSB: Analytic thinking

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2 Copyright © 2024 Pearson Education Ltd. All Rights Reserved.5) Production efficiency implies that

• joint profits are maximized.
• joint profits are minimized.
• joint profits are zero.
• joint profits can be increased.

Answer: A

Section: The Principal-Agent Problem

Question Status: Old

AACSB: Analytic thinking

6) Many professional sports athletes have incentive clauses in their contracts. These indicate that

• the team owner has asymmetric information.
• the athlete might engage in moral hazard, which the team owner wishes to avoid.
• the athlete might engage in adverse selection, which the team owner wishes to avoid.
• the athlete has stronger negotiators.

Answer: B

Section: The Principal-Agent Problem

Question Status: Old

AACSB: Analytic thinking

7) In professional golf, a tournament winner might win, say, $1 million, whereas second place wins only $600,000. Why might golf have a 40% reduction in prize money from first and second place?

• to ensure that there is enough money to pay those who finish near last
• to motivate golfers to take risks they might not otherwise take
• to motivate golfers to not take risks they might otherwise take
• The Professional Golfers Association is a cartel.

Answer: B

Section: The Principal-Agent Problem

Question Status: Old

AACSB: Analytic thinking

8) In NASCAR, a race winner might win, say, $500,000, whereas second place wins $450,000.Why might NASCAR have a 10% reduction in prize money from first and second place?

• to ensure that there is enough money to pay those who finish near last
• to motivate drivers to take risks they might not otherwise take
• to motivate drivers to not take risks they might otherwise take
• NASCAR is a cartel.

Answer: B

Section: The Principal-Agent Problem

Question Status: Old

AACSB: Analytic thinking

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3 Copyright © 2024 Pearson Education Ltd. All Rights Reserved.9) Season ticket holders often purchase their tickets before a season begins. There is often a discount associated with season tickets. Why?

• Buying season tickets entails risk, which consumers are willing to bear if they are

compensated for doing so.

• Buying season tickets is a way of guaranteeing a supply of tickets for the secondary market.
• Selling season tickets entails greater transactions costs which team owners hope to avoid.
• Sports teams are local monopolies.

Answer: A

Section: The Principal-Agent Problem

Question Status: Old

AACSB: Analytic thinking

10) Season tickets entail a certain amount of risk due to unpredictable team quality, injuries, weather, and so forth. Who is most likely to purchase season tickets?

• Sally, who is a rabid fan and is not wealthy
• Jim, who is a rabid fan and is risk neutral
• Roger, who is a rabid fan but is risk averse
• Jenn, who is a fan and is very wealthy

Answer: B

Section: The Principal-Agent Problem

Question Status: Old

AACSB: Analytic thinking

11) What is one potential problem with nationalized health care?

• It might not be efficient in risk bearing.
• It is guaranteed to solve the principal-agent problem.
• It would be efficient in risk bearing.
• It might cost too much.

Answer: A

Section: The Principal-Agent Problem

Question Status: Old

AACSB: Analytic thinking

12) We can say that a contract is able to prevent moral hazard when

• it eliminates production inefficiencies due to moral hazard without shifting risk to risk-averse

people.

• it eliminates production inefficiencies due to moral hazard without shifting risk to risk-loving

people.

• it shifts risk to risk-loving people.
• it eliminates production inefficiencies due to moral hazard and shifts risk to risk-averse

people.

Answer: A

Section: The Principal-Agent Problem

Question Status: Old

AACSB: Analytic thinking

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