248f06x2 - ALLEGHENY COLLEGE DEPARTMENT OF ECONOMICS...

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ALLEGHENY COLLEGE DEPARTMENT OF ECONOMICS ECONOMICS 248 MIDTERM 2 FALL 2006 NAME: _______________________ You may take this exam in any open classroom on the second floor of Quigley Hall. You may not leave the second floor of Quigley Hall with the exam. If you do so, you will automatically fail the exam. 1. (8) Suppose Beth has a painting that she wants to sell. Beth values the painting at $40,000. Beth and Monica agree to trade the painting for $80,000. After the deal is made, but before the painting or cash is transferred, Andrew comes along and offers $90,000 for the painting. If transaction costs are zero, then what is the best way to enforce the original contract if we are interested in maximizing social wealth? 2. (3) Suppose two people who want to contract are not opportunistic but are boundedly rational. If this is the case, then they will engage in: a. Comprehensive contracting b. General clause contracting. c. No contracting, the transaction costs will be too high. d. Notational contracting. e. None of the above. 1
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The information below refers to questions 3-6. Elise has decided to cheat on her final exam by hiring a substitute to take it. If she took the exam herself, she would receive a score of 75. Elise has two options for cheating: hire Beth to take the final in her place (Beth promises to score a 90 on the final) or hire Jill to take the final in her place (Jill promises to score an 85 on the final). Suppose that a) cheating is legal and breach of contract is enforceable and b) Elise promises to pay either Jill or Beth only after she receives her final score. $ $100
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248f06x2 - ALLEGHENY COLLEGE DEPARTMENT OF ECONOMICS...

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