31) Under which one of the following contracts does an agent have the least ince

Question

31) Under which one of the following contracts does an agent have the least incentive to behave 31) opportunistically? A) The agent pays a fixed fee to the principal for the right to all future payoffs B) The agent works for the principal on a per unit basis C) The agent recelves a share of the profit D) The agent works for the principal on an hourly basis 32) Which of the following games involving the roll of a single die is a fair bet? 32) A) Bet $1 and receive $4 if 6 comes up. C) Bet $1 and receive $1 if 3 or 4 comes up. D) None of the bets is a fair bet B) Bet $1 and receive $1 if 3, 4, or 5 comes up 33) A game includes A) a strategy C) rules. B) payoffs D) All of the above. 34) lf Ben values good X more than good Y and Catherine values good Y more than good X a firm can ) increase its profits by A) charging one price per good. C) bundling the goods B) selling the goods in a competitive market. D) charging the same price for both goods. 35) Sarah earms $40,000 per year working for a large corporation. She is thinking of quitting this job to 35) work full time in her own business. She will invest her savings of $50,000 (which currently has an annual 10% rate of return) into the business. Her annual opportunity cost of this new business is A) $o. B) $90,000 C) $40,000 D) $45,000 36) 36) Someone who is risk-averse has A) diminishing marginal utility of wealth. B) constant marginal utility of wealth. C) increasing marginal utility of wealth. D) less marginal utility of wealth than someone who is risk-neutral. 37) Price discrimination A) is illegal in the U.S. B) is a form of pricing where consumers pay different prices for a good. C) allows firms to set a single intermediate price between consumers low and high willingness to pay D) is when consumers use prices to discriminate between different quality products B-6

Explanation / Answer

31) A) The agent pays a fixed fee to the principal for the right to all future payoffs

In this principle , it lies on residual ownership of financial and physical assests, which gives the owner exclusive right to property and assests. Thus hierarchical control weakens the agent's incentive

32) B) Bet $1 if 3,4, or 5 comes up

In a fair bet, the expected value is zero. This bet will have either a payoff of $1 if 3, 4, or 5 comes up (P = .5), or  -$1 if 1, 2, or 6 comes up (P= .5). Thus the expected value is . 5(1) + . 5(- 1) = 0. Thus this is a fair bet.

33) D) All the above

A game includes all of the included options. Players play in a specific strategy, which resulted them payoffs, where the game has some certain rules.

34) C) Bundling the goods

Irrespective of Individual choices, a firm can always makes it's profit by bundling the goods

35) D) $45,000

The annual oppurtunity cost of new business = Annual earning in previous company + annual rate of return

= $40,000 + ($50,000 * 10%)
= $45,000

36) A) Diminishing Marginal Utility of wealth

A risk averse people always has marginal utility of wealth. If a person has a chance to win a large amount by betting, where the chance of winning is less than chance of winning a small amount by betting, the person will always choose a small bet.

37) B) is a form of pricing where consumers pay different prices for a good

Price Discrimination is a pricing strategy where customers pay different prices for same product.

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