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Inducing the worker to exert effort A worker can exert two effort levels, good or bad which induce a production error with probability 1/4 and 3/4 respectively. His utility function is: U(w,e)=100-10/w-c where w is the wage received and c takes the value of 2 if effort is good and 0 if effort is bad. Production errors are observable and so can be introduced into the worker’s contract but effort cannot. The product obtains is worth 20 if there are no errors and 0 otherwise. The principal is risk-neutral. Assume that the worker has reservation utility equal to u0=0
Calculate the optimal contract and the effort that the principal desires under conditions of symmetric information.
Calculate the optimal contract and the effort that the principal desires under conditions of asymmetric information.
Suppose that a second worker became available. Elucidtae the resulting change in production possibilities. Now what would be the opportunity cost of sanding two floors.
If a consumer is given a $10 gift certificate good only for items in store X, and all items in store X are normal goods, then the consumer desires to consume: Select one: a. more goods in store X. b. fewer goods in store X. c. the same amount of good..
Government policy has typically been driven by political ideology. Radical writers argue that the MNE is an instrument of imperialist domination, but the free market view argues that international production should be distributed among countries acco..
Consider a perfectly competitive industry. Market demand is P=500-2Q and all firms are identical. Find the market’s long-run equilibrium price. Show that the firm's profit is zero at this price. c. If all firms are identical, then how many firms is c..
Illustrate what happens to official measure of GDP when air quality improves significantly in united states but there are no effects on aggregate production or on market prices of final goods and services.
A phone manufacturer wants to compete in the touch screen phone market. He understands that the lead product has a battery life of just 6 hours. The manufacturer claims that while the new touch phone is more expensive, its battery life is more than t..
Explain the likely effects of a U.S. recession on the demand for Canadian exports. What would be the effect on Canadian aggregate demand? Suppose the Bank of Canada viewed its monetary policy as being appropriate (for keeping output close to potentia..
As the economy expands and approaches the peak of a business cycle, which of the following tends to happen automatically, without a specific change in policy?
Suppose medical care is consumed only in units of a homogeneous quantity, for instance, office visits which are priced at $40 per visit. The available insurance plan carries a $200 deductible and has a coinsurance rate of 20%. Graph the out-of-pocket..
Draw the opportunity set of a consumer with an income of $1200 who faces prices of Px = 10 and Py = 5. What is the market rate of substitution between the two goods?
Frankie and Johnny can both earn a wage rate of $10 per hour and, coincidentally, both have $100 per week in non-labor income. Assume that both have T = 100 hours per week to allocate to leisure and work. Frankie chooses to work 40 hours per week. Us..
Illustrate happens to the amount of debt held by the public. Illustrate what happens to the level of gross debt.
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