Question 1

Jim's Hardware Supply has theft insurance. Jim also has an alarm system. The alarm system has just recently malfunctioned. If Jim has the alarm system repaired, it will cost him $100. The probability of a theft occurring is  If a theft occurs and there is no alarm system, the value of stolen materials will be $125,000. However, Jim's insurance will compensate him fully for the loss. No thefts will occur if the alarm system is in place. What is the expected cost to Jim of repairing the alarm system? What is the expected cost to society of not repairing the alarm system?

Accepted Answer

The answer of Jim's Hardware Supply has theft insurance. Jim...

Question 2

Trisha's Fashion Boutique is considering a profit sharing arrangement with her employees. Currently, the employees receive an annual bonus. Trisha can sell all the output she produces for $150 per unit. Trisha's total cost function (including bonus payments to employees) is:  The marginal cost function is:  The profit sharing plan would pay employees 30% of profits. However, due to greater cost saving initiatives from employees, Trisha's total cost function becomes:  The relevant marginal cost function becomes:  Which plan offers Trisha the greatest profits for herself?

Accepted Answer

The answer of Trisha's Fashion Boutique is considering a profit...

Question 3

If all of the divisions in a vertically integrated firm are owned by the same company, why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms?

Accepted Answer

Even though all the divisions are owned by the same company, managers in some divisions may not have information about production capacities or costs in related divisions. This lack of information can lead to inefficient decision-making, such as overproduction in one division and underproduction in another. As a result, asymmetric information problems can still arise in vertically integrated firms despite ownership by a single company.

Question 4

Firms that contain some divisions that produce parts and components to be used by other divisions in order to generate finished goods are said to be:

Accepted Answer

Firms that contain some divisions that produce parts and components to be used by other divisions in order to generate finished goods are said to be vertically integrated.

Question 5

Ms. Moneynickel operates a retail store in the local mall. The marginal product of labor at the mall is a function of employee effort level. The marginal product of employee effort is:  Ms. Moneynickel can sell all the product she stocks for $20. Employees determine their effort level according to the function:  where  is the minimum wage. Currently, the minimum wage is $6. The marginal cost to Ms. Moneynickel of effort is:  What is the wage rate Ms. Moneynickel should offer her employees to maximize profits? If the minimum wage is increased by $1, how much should Ms. Moneynickel increase the wage rate paid to her employees?

Accepted Answer

The answer of Ms. Moneynickel operates a retail store in...

Question 6

The "efficiency wage" is the wage at which:

Accepted Answer

The efficiency wage is the wage at which employees have no incentive to shirk. This means that the wage is high enough to provide an incentive for employees to work hard and avoid shirking or slacking off on the job. If the wage is too low, employees may be more likely to shirk or engage in other forms of unproductive behavior on the job. Therefore, paying a higher efficiency wage can actually increase productivity and overall output in the long run.

Question 7

The professional baseball league on planet Economus allows team owners to draft players for life. Once a player is acquired in the draft, team owners may trade players to other teams. The demand for high quality players is:  The supply of high quality players is:  What is the lowest price necessary to induce an owner to trade a high quality player. Determine the equilibrium price and quantity of high quality players. The demand for low quality players is:  The supply of low quality players is:  Determine the equilibrium price and quantity of low skill players. Now, suppose that only the team that has the rights to the player knows the quality of the player. This implies the new demand for players of uncertain quality is:  The supply of players becomes:  Derive the equilibrium price and quantity for players of uncertain ability. Do you believe any high quality players are being traded at this new market price?

Accepted Answer

The answer of The professional baseball league on planet Economus...

Question 8

In a competitive labor market, shirking on the job can be a problem. In this market for labor services, the demand for labor is expressed as: W = where W is wage rate (dollars per hour) and L is number employed per unit of time. The no shirking constraint (NSC) is expressed as: NSC = where NSC is the minimum wage workers need not to shirk, and L is the number employed per unit of time. Assume that the labor force L^* = 150,000. Determine the following: a. the level of unemployment that would result when firms pay the efficiency wage b. the market clearing wage c. the efficiency wage

Accepted Answer

The answer of In a competitive labor market, shirking on...

Question 9

Some firms provide stock options to managers as an incentive to work hard and increase the value of the firm. A typical option contract gives the manager the right to buy the firm's stock at a set price (known as the exercise price). If the firm's stock value increases and moves above the exercise price, then the manager's option becomes more valuable. What is the potential problem with this incentive scheme?

Accepted Answer

The potential problem with this incentive scheme is that there is a dynamic incentive problem where the manager may focus too much on the firm's short-run stock value and not on actions that are in the best interest of the firm for the long run. This may result in the manager taking risky actions or engaging in short-termism that can harm the firm's long-term value. Therefore, option contracts may not always lead to optimal incentives for managers.

Question 10

Ron owns an automotive repair center. Ron provides high quality automotive repair. The market price for high quality service is $225 while the market price for standard service is $150. Currently, Ron only has a reputation for providing standard service. Ron's marginal cost function of providing high quality service is:  Ron's marginal cost function of providing standard service is:  Butch's Marketing has told Ron that if he hires Butch's firm to advertise and market Ron's high quality services, consumers will pay him the high quality service market price providing he delivers that quality. What is the most amount of money Ron is willing to pay for Butch's services?

Accepted Answer

The answer of Ron owns an automotive repair center. Ron...

Question 11

Glen's friend Andre is a big strong guy. Andre will not allow anyone to harm Glen. Glen enjoys teasing people. In fact, Glen's marginal benefit of teasing people is given by:  Generally, people do not enjoy Glen teasing them. Thus, they retaliate to Glen's teasing. Without Andre around to protect Glen from the retaliation, Glen's marginal cost of teasing people is  due to the retaliation. However, with Andre around, Glen perceives his marginal costs of teasing to always be zero as no one will retaliate with Andre around. This is because Andre will step in to protect Glen from retaliation. Without Andre around, what is Glen's choice for teasing? How much does Glen increase teasing when Andre's around? Is Glen's behavior characteristic of a moral hazard or adverse selection?

Accepted Answer

The answer of Glen's friend Andre is a big strong...

Question 12

Wiz-Bang Games is a new video game maker for the latest game console. As a new game maker, they have not established a reputation of providing quality games. The marginal cost to Wiz-Bang for manufacturing games is:  The market price for low-quality games is $20. The market price for high-quality games is $65. If Wiz-Bang sells their product in the low quality market, calculate their producer surplus. If Wiz-Bang sells their product in the high quality market, calculate their producer surplus. If Wiz-Bang spends $12,500 on marketing and packaging, they will be perceived as a high quality producer of video games. Should Wiz-Bang spend the $12,500 to provide a signal to video game consumers of producing high quality games?

Accepted Answer

The answer of Wiz-Bang Games is a new video game...

Question 13

Matthew drives a truck for Overtheroad Haulers. Matthew's marginal benefit for driving per day is:  where m is the number of miles driven. The marginal social cost per mile is  Calculate the efficient number of miles driven for Matthew in a day. Since Overtheroad Haulers has full insurance on Matthew's truck, Matthew's personal marginal cost is:  How many miles per day will Matthew drive? Would it be efficient for society if Overtheroad Haulers places a limit on the number of miles Matthew drives? If so, what limit should they set?

Accepted Answer

The answer of Matthew drives a truck for Overtheroad Haulers....

Question 14

Mr. Barnes operates a power plant in the local market. His marginal revenue of average employee effort level is:  The marginal cost of effort to Mr. Barnes is:  Employees set their effort level according to:  where  is the average wage at all other jobs in the local market. Currently, this average is $7.50. If Mr. Barnes pays a wage rate of $7.50, is he maximizing profits? If not, what wage rate should Mr. Barnes pay?

Accepted Answer

The answer of Mr. Barnes operates a power plant in...

Question 15

Suppose the plant owners design an incentive scheme for the plant manager in which the feasible production level is set equal to output from the previous quarter. The bonus payment is determined by the formula B = 0.2Q_f + 0.2(Q - Q_f). What potential problems can arise with this scheme?

Accepted Answer

The answer of Suppose the plant owners design an incentive...

Question 16

Prestige University grants degrees only to high skill students who perform well for their eventual employers. Mediocre University grants degrees only to low skill students. The market demand for newly graduated high skilled workers is:  The market demand for newly graduated low skilled workers is:  Currently, Prestige University graduates 1,000 students while Mediocre University graduates 5,000. Determine the equilibrium prices for low and high skilled graduates. Suppose that in an effort to cut costs, the State has merged Prestige University and Mediocre University into State University. This merger has eliminated the signal that employers use to rely on to discern graduate quality. As a result, the demand for State University graduates is:  The number of graduates from State University will be 6,000. Calculate the equilibrium price for State University graduates. Before the merger, would students at both Universities be willing to pay higher tuition in an effort to prevent the Universities from merging? Why or why not?

Accepted Answer

The answer of Prestige University grants degrees only to high...

Question 17

Cecil's Home Appliances sells high quality washing machines. Cecil's marginal cost function is:  Zach's Appliances sells low quality washing machines. Zach's marginal cost function is:  The market demand for high quality washing machines is:  The market demand for low quality washing machines is:  If Consumer's can distinguish between the quality of Cecil's and Zach's machines (and Cecil and Zach behave as price takers), determine the equilibrium price of washing machines. Calculate Cecil's producer surplus. Now, suppose that consumers cannot distinguish between the quality of Cecil's and Zach's washing machines. In this case, the demand for washing machines is:  Determine the joint market supply curve. Calculate the equilibrium price of washing machines and the quantity brought to market by Cecil and Zach. What is Cecil's producer surplus? If Cecil offers a warranty on his washing machines, his marginal cost function becomes:  However, consumers will then perceive his machines to be high quality. Should Cecil offer the warranty?

Accepted Answer

The answer of Cecil's Home Appliances sells high quality washing...

Question 18

Trisha's Fashion Boutique is considering a profit sharing arrangement with her employees. Currently, the employees receive an annual bonus. In a "Boom" market, Trisha can sell all the output she produces for $225 per unit. In a "Bust" market, Trisha can sell all the output she produces for $125 per unit. The probability of a "Boom" market is 75% and the probability of a bust market is 25%. Trisha's total cost function (including bonus payments to employees) is:  The marginal cost function is:  The profit sharing plan would pay employees 30% of profits. However, due to greater cost saving initiatives from employees, Trisha's total cost function becomes:  . The relevant marginal cost function becomes:  Which plan offers Trisha the greatest expected profits for herself? Suppose the employees will only approve a profit sharing plan if they are guaranteed their portion of profits will be at least $400. Will the employees approve of the profit sharing program?

Accepted Answer

The answer of Trisha's Fashion Boutique is considering a profit...

Question 19

Ty's Sporting Goods is considering rewarding employees with profit sharing for good performance. Without the sharing plan, Ty's total cost function is:  and his marginal cost function is:  Ty can sell all his output for $500. Calculate Ty's optimal output level. What is his level of profits? If Ty implements the profit sharing plan, his total cost function is:  and his marginal cost function is:  If the profit sharing plan entitles his employees to 25% of the profits, should Ty institute the plan?

Accepted Answer

The answer of Ty's Sporting Goods is considering rewarding employees...

Question 20

Hart's Pinefall Lodge provides guided hunts and fishing trips to their customers in Ontario, Canada. The market price for high quality hunting and fishing trips is $1,250. The market price for standard quality hunting and fishing trips is $750. The marginal cost of providing high quality trips each season is:  The marginal cost of providing standard quality trips each season is:  In order to be able to sell their hunting and fishing trips at high quality prices, Hart's Pinefall Lodge must pay an advertising fee of $500 each season. Should the Lodge pay the fee and sell high quality trips?

Accepted Answer

The answer of Hart's Pinefall Lodge provides guided hunts and...

Quiz 17: Markets With Asymmetric Information

If all of the divisions in a vertically integrated firm are owned by the same company, why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms?

Firms that contain some divisions that produce parts and components to be used by other divisions in order to generate finished goods are said to be:

The "efficiency wage" is the wage at which:

Suppose the plant owners design an incentive scheme for the plant manager in which the feasible production level is set equal to output from the previous quarter. The bonus payment is determined by the formula B = 0.2Q_f + 0.2(Q - Q_f) . What potential problems can arise with this scheme?

Quiz 17: Markets With Asymmetric Information

If all of the divisions in a vertically integrated firm are owned by the same company, why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms?

Firms that contain some divisions that produce parts and components to be used by other divisions in order to generate finished goods are said to be:

The "efficiency wage" is the wage at which:

Suppose the plant owners design an incentive scheme for the plant manager in which the feasible production level is set equal to output from the previous quarter. The bonus payment is determined by the formula B = 0.2Qf + 0.2(Q - Qf) . What potential problems can arise with this scheme?

Suppose the plant owners design an incentive scheme for the plant manager in which the feasible production level is set equal to output from the previous quarter. The bonus payment is determined by the formula B = 0.2Q_f + 0.2(Q - Q_f) . What potential problems can arise with this scheme?