Assume that a firm pays its workers above the market-clearing wage in a competitive industry. Explain how this might be a strategy to mitigate the problem of moral hazard?
What will be an ideal response?
Supervising employees is costly but often necessary to insure that workers are doing their jobs. Paying workers a wage that is higher than the market-clearing wage may actually result in workers being more productive and less inclined to loaf around if the cost of losing one's job means a significant salary reduction.
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The short run is a time period such that:
a. the existing firms in the market do not have sufficient time to change the amounts of any of the inputs that they employ. b. the existing firms in the market do not have sufficient time to either increase or decrease their current rate of output. c. the existing firms in the market do not have sufficient time to increase the size of their existing plant or build a new factory. d. new firms may build plants and enter the industry.
Why would one expect the AD curve to be vertical?
A. People do not make choices based on relative prices, but instead based on absolute prices. B. If the price level rises, changes in choices by suppliers are offset by changes in demanders. C. If the price level rises, relative prices haven't changed so people would not change their choices. D. Substitution is not one of the reasons why the AD curve has its slope.