Sam hires an attorney to present a court case. If Sam wins the case, he will receive some money. This payoff is a function of the attorney's hours and which judge is assigned the case that day
Judge A is very understanding toward people in Sam's position, but judge B is very harsh toward people like Sam. Is it possible for Sam to get the attorney to deliver the optimal amount of effort and make the attorney bear all of the risk?
Yes. If Sam accepts a fixed payment from the attorney and lets the attorney keep the proceeds, if any, from the case, the attorney bears all of the risk. Since the attorney will enjoy the full marginal benefit of her effort, she puts in the optimal level of effort.
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Refer to Pollutants. Suppose transactions costs are zero. Who should be made liable for the crop damage if the goal is to achieve an efficient outcome?
A chemical plant's production adds pollutants to a stream which irrigates a farm's crops. The pollutants damage the farm's crops, increasing the firm's costs by $800 per month. The crop damage may be eliminated in two ways: the chemical plant can install a new filtering system costing $300 per month, or the farm can install a new irrigation system costing $600 per month. a. The chemical plant should be made liable, because it is the source of the pollution. b. The chemical plant should be made liable, because it possesses the least-cost method of eliminating the externality. c. The farm should be made liable, because it can receive a bribe from the chemical plant. d. An efficient outcome will be achieved no matter who is made liable for the crop damage.
The term prisoners' dilemma
a. refers only to situations where prisoners' must confess on one another. b. is in agreement with Adam Smith's invisible hand idea. c. represents situations where people do not act in their own self interest. d. can be applied to show why cartels are difficult to maintain.
The risk premium is negative when tastes are risk averse.
Answer the following statement true (T) or false (F)
Situation 4-1 During the winter of 1973-74, a general system of wage and price controls (including a price ceiling on gasoline) was in force in the United States. At the beginning of 1974, some oil-producing countries imposed an oil embargo (a legal prohibition on commerce) on the West. In the spring of 1974, price controls were abolished. Refer to Situation 4-1. Before the oil embargo, the price
ceiling on gasoline had no noticeable effect on the market. What is the most likely explanation for this? A) The equilibrium price of gasoline was probably below the price ceiling. B) The demand curve for gasoline in the 1970s was vertical. C) The supply curve for gasoline in the 1970s was vertical. D) The equilibrium price of gasoline was probably above the price ceiling.