Practice_Chapter 10 - Chapter 10 Incentive Conflicts and...

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Chapter 10 Incentive Conflicts and Contracts Incentive problems can be overcome, then it is in the interest of all parties to develop efficient solutions to agency problems. Through ______ , there will be more wealth to be shared among contracting parties. A. adverse selection B. value maximization C. contracting until marginal benefit (MB) equals zero D. asymmetric information Mary Jo Smith is willing to work for $3,200 per month. She asks the HR manager at Plain Truth Advertising for $4,000 per month. While he was willing to pay $3,700 per month, he rejects her application and begins to search for a new employee again. This is an example of: A. adverse selection. B. value maximization. C. bargaining failure. D. agency incentive problems. Billy Mac Tailor drives an eighteen-wheeler CG Carriers. He always stops at All Bright truck stops to by diesel fuel. He is a preferred customer and gets a free meal and shower worth $10.00. But All Bright charges $12.00 more for a fill up than most competitors. Which of the following is true? A. CG Carriers gets a benefit of $22.00 because Tailor is a preferred customer. B. CG Carriers has a wealth reduction of $2.00 even though they do not know about Tailor's actions. C. There is a wealth transfer to Billy Mac Tailor and CG Carriers has a wealth reduction of $12.00 . D. Billy Mac Tailor increases his income by $10.00 and CG Carriers also benefits. Monitoring costs are: A. the costs of a failure in bargaining. B. rarely incurred in contracts between a principal an agent. C. the insurance costs of guaranteeing that the principal will not incur a cost of contract failure.
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