If information is asymmetric, explain why the hire contract is not efficient in production and a moral hazard exists, but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem
What will be an ideal response?
With the hire contract, the agent has no incentive to behave in such a manner as to maximize the joint profit of the agent and the principal. The contract provides no incentive for the agent to behave optimally, and the contract does nothing to prevent moral hazard. The agent can usually increase his value of the contract by committing a moral hazard. The fixed fee to the principal contract gives the agent all the profit after the fee to the principal is paid. This provides an incentive for the agent to behave optimally and maximize the profit of the firm. The agent's desire to behave optimally prevents moral hazard.
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The income approach to calculating GDP:
A. is more accurate than using the expenditure approach. B. is less accurate than using the expenditure approach. C. will generate the same answer as using the expenditure approach. D. is simpler to calculate than the expenditure approach.
Which of the following is true about the long run operations of perfectly competitive firms? a. They produce with productive efficiency. b. They produce with allocative efficiency. c. They earn zero economic profits
d. all of the above
Which of the following is the formula for the government's budget deficit?
a. S - G b. G -T c. C + I + G d. S + I e. I + G
__________________ - Every pareto optimal point on the contract curve is a feasible equilibrium
Fill in the blank(s) with the appropriate word(s).