A executive can either slack (effort e = 0) or work hard (e = 1) on behalf of shareholders. If she slacks, the firm earns a gross return of 1,000 for sure. If she works hard, there is an even chance of the gross return being 10,000 or 80,000 . Her overall utility equals her utility from wage income (of the form w1/2, where w is the wage) minus the disutility of work (simply d), or in other words
U = w1/2 – d. If she slacks, she experiences no disutility of work (d = 0) but if she works hard, the disutility of work is d = 50 . Assume that U = 0 in her next best available job. What is the optimal wage contract that shareholders would offer if they can observe the effort of the executive?
a. A flat wage w = 0 and no requirement to work hard.
b. A flat wage w = 50 and a requirement to work hard.
c. A flat wage w = 2,500 and a requirement to work hard.
d. A share of 50% of the profits and a requirement to work hard.
c
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Which of the following is true of a consumption function with income taxes?
a. It is flatter than a consumption function without income taxes. b. It is steeper than a consumption function without income taxes. c. It lies above a consumption function without income taxes d. It lies below a consumption function without income taxes.
What is the effect of the establishment of a price ceiling below the equilibrium price?
a. increased production leading to excesses b. increased demand leading to shortages c. more goods available to consumers d. fewer buyers looking to purchase goods
Figure 14.3 represents the market for used refrigerators. Suppose buyers are willing to pay $300 for a plum (high-quality) used refrigerator and $100 for a lemon (low-quality) used refrigerator. If buyers believe that 50% of used refrigerators in the market are lemons (low quality), what fraction of used refrigerators sold will actually be plums (high quality)?
A. 50/250 B. 50/300 C. 250/300 D. None of the refrigerators sold will be plums.
A profit-maximizing monopolist will always raise output if marginal revenue exceeds marginal cost.
Answer the following statement true (T) or false (F)