Question 1

Explain how stock options can ensure compatibility between the interest of stockholders and managers.

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Question 2

If, after careful analysis, an economist concludes that there has been a market failure, which of the following possible corrective actions might the economist favor? Why?
a.prohibiting the activity
b.charging fees for continuing the activity
c.requiring that the public be informed of the activity
d.government purchase of the item for the public

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Question 3

Hostile takeovers of corporations have been in the business news for some time now.Several states have passed laws making it harder for out-of-state corporations to acquire firms headquartered in their states.Several corporations have established "golden parachutes" to give executives high payoffs in case of hostile takeover.What market imperfection is likely to be worsened by these actions? Explain.

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Question 4

Some would cite the purchase of defective products and the rising cost of health care as market failures.Argue that these are not true market failures.

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Question 5

It was once common for people to have servants who helped with the cooking and cleaning.Use the cost disease of the personal services dilemma to explain why these services have declined, even though one would expect an increased use in this age of the two-worker household.

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Question 6

Suppose that the government decided to increase interest rates in order to encourage saving.Would this likely lead to an increase in investment and higher future economic growth rates? Explain.

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Question 7

The interest rate is the opportunity cost of transferring spending power between time periods.However, the market mechanism may fail to provide adequately for future economic growth.List the reasons why a market might fail.

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Question 8

During the 1992 presidential campaign, H.Ross Perot made much of the various "special interests" which lobby in Washington, D.C.How might an economist view this? Which specific market breakdown may occur if there is lobbying? Relate your answer to the study of monopoly and oligopoly.

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Question 9

What are private goods? Mention two important attributes of private goods.

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Question 10

Discuss the role of trust as a critical piece of any principal-agent situation.In particular, what role did trust play in the recent stock market scandals?

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Question 11

Why do markets tend to underproduce public goods?

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Question 12

Unscrupulous managers have learned ways to manipulate stock options and undermine their benefits to stockholders.Discuss some provisions that could be built into the process to curb such practices.

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Quiz 15: The Shortcomings of Free Markets