Question 1

In a field experiment, a man who did not need dental treatment consulted 180 dentists. 50 dentists recommended at least one filling. Explain the moral hazard.&#10;A) The &#34;patient&#34; was less well informed about his condition than the dentists.&#10;B) The 50 dentists exploited his ignorance to recommend treatment that was unnecessary but would increase their earnings.&#10;C) Both a and b.&#10;D) Neither a nor b.

Accepted Answer

The moral hazard arises because the dentists, who have more information about dental health, may exploit the patient's lack of knowledge to recommend unnecessary treatments for their own financial benefit. This situation involves both the patient's relative ignorance and the potential exploitation by the dentists.

Question 2

Why might it be better to pay sales staff a commission on their sales rather than an hourly wage?&#10;A) Encourages the salespersons to increase their effort (which the employer cannot observe).&#10;B) Increases the risk on salespersons.&#10;C) Both a and b.&#10;D) Neither a nor b.

Accepted Answer

Paying sales staff a commission incentivizes them to increase their effort and performance, as their earnings are directly tied to their sales results.

Question 3

Consider that extraneous factors might affect a worker's performance. Why does pay based on performance increase the risk that the worker bears?&#10;A) The extraneous factors can degrade or enhance the worker's performance.&#10;B) The worker has asymmetric information about the extraneous factors.&#10;C) The extraneous factors are unpredictable.&#10;D) a and b.&#10;E) a and c

Accepted Answer

Extraneous factors, which are unpredictable and can either degrade or enhance a worker's performance, increase the risk for the worker because their pay is directly affected by these uncontrollable elements.

Question 4

How would work from home affect the degree to which supervisors can monitor the members of their team?&#10;A) Reduce.&#10;B) Increase.&#10;C) No change.

Accepted Answer

Work from home can reduce the degree to which supervisors can monitor their team members due to the lack of physical presence, making it harder to observe daily work habits and interactions directly.

Question 5

Explain the differences between moral hazard and holdup.&#10;A) Moral hazard arises when a party who is better informed about her actions.&#10;B) Holdup can occur even if information about actions is symmetric.&#10;C) a and b.&#10;D) Neither a nor b.

Accepted Answer

Moral hazard involves situations where one party takes on more risk because they know the other party will bear the cost, often arising in contexts where one party has more information about their actions than the other. Holdup, on the other hand, refers to a situation where one party exploits their bargaining position at the expense of another, and this can occur even when both parties have symmetric information about actions.

Question 6

Compare acting that involves nudity with that which does not involve nudity. Which scenes involve greater potential for hold up by the producer or actor?&#10;A) Nude scenes.&#10;B) Scenes that do not involve nudity.&#10;C) Neither: the same.

Accepted Answer

Nude scenes involve greater potential for hold up by the producer or actor due to the sensitive nature of the content, potential discomfort of the actors, and the need for strict adherence to legal and ethical guidelines.

Question 7

Which method of transporting natural gas involves a larger sunk investment - pipeline or tanker?&#10;A) Pipeline.&#10;B) Tanker.&#10;C) Neither: the same.

Accepted Answer

Pipeline transportation of natural gas requires a significant upfront investment in infrastructure, including the construction of the pipeline itself, compressor stations, and maintenance facilities. This infrastructure is fixed and extensive, leading to higher sunk costs compared to the more flexible and less infrastructure-intensive tanker transportation.

Question 8

Compare an employee driver of a taxi company with an Uber contractor driver. In which case does the driver own greater residual rights to her income from work?&#10;A) Employee driver.&#10;B) Uber contractor.&#10;C) Neither: the same.

Accepted Answer

Uber contractor drivers typically have greater control over their income, as they can decide when, where, and how much they work, directly influencing their earnings. In contrast, employee drivers of a taxi company may have fixed schedules and fares, limiting their ability to increase their income.

Question 9

A single restaurant and a chain are each considering whether to set up their own delivery service or contract with Deliveroo. What factor would make it more likely that the single restaurant should outsource deliveries.

A) Moral hazard.
B) Potential for holdup.
C) Lack of economies of scale.
D) None of the above.

Accepted Answer

Lack of economies of scale makes it more likely for a single restaurant to outsource deliveries because it may not be cost-effective for them to maintain their own delivery service due to lower volume of orders compared to a chain. Outsourcing can provide access to a larger delivery network and reduce costs.

Question 10

Consider a manufacturer which depends on a monopoly supplier of some essential input. Why should the manufacturer consider producing the input in-house?&#10;A) Moral hazard.&#10;B) Potential for holdup.&#10;C) Economies of scale.&#10;D) None of the above.

Accepted Answer

The potential for holdup is a significant concern when a manufacturer depends on a monopoly supplier for an essential input. The supplier might exploit its monopoly position to impose unfavorable terms, prices, or even threaten to cut off supply, leaving the manufacturer vulnerable. Producing the input in-house can mitigate this risk by reducing dependency on the external supplier.

Question 11

In a field experiment, a man who did not need dental treatment consulted 180 dentists. Fifty dentists recommended at least one filling. Explain the moral hazard.

Accepted Answer

The answer of In a field experiment, a man who...

Question 12

Why might it be better to pay sales staff a commission on their sales rather than an hourly wage?

Accepted Answer

The answer of Why might it be better to pay...

Question 13

Consider that extraneous factors might affect a worker's performance. How does pay based on performance affect the risk that the worker bears?

Accepted Answer

The answer of Consider that extraneous factors might affect a...

Question 14

How would work from home affect the degree to which supervisors can monitor the members of their team?

Accepted Answer

The answer of How would work from home affect the...

Question 15

Explain the differences between moral hazard and holdup.

Accepted Answer

The answer of Explain the differences between moral hazard and...

Question 16

Contracts for acting that involve nudity are more detailed than those that do not involve nudity. Why?

Accepted Answer

The answer of Contracts for acting that involve nudity are...

Question 17

Which method of transporting natural gas involves a larger sunk investment - pipeline or tanker?

Accepted Answer

The answer of Which method of transporting natural gas involves...

Question 18

Compare (i) an Uber contractor driver with (ii) an employee driver of a taxi company. In each case, who owns the residual rights to the income from the driver's work?

Accepted Answer

The answer of Compare (i) an Uber contractor driver with...

Question 19

A single restaurant and a chain are each considering whether to set up their own delivery service or contract with Deliveroo. What factor would make it more likely that the single restaurant should outsource deliveries.

A) Moral hazard.
B) Potential for holdup.
C) Lack of economies of scale.
D) None of the above.

Accepted Answer

The answer of A single restaurant and a chain are...

Question 20

Consider a manufacturer which depends on a monopoly supplier of some essential input. Why should the manufacturer consider producing the input in-house?

Accepted Answer

The answer of Consider a manufacturer which depends on a...

Deck 12: Incentives and Organization