What problems arise from the CPI bias?
What will be an ideal response?
The upward bias in the CPI distorts private contracts and government outlays that include formulas based on CPI change as a measure of inflation. If the intent is to maintain the real value of a payment, indexing payments to the CPI will in fact increase the real value of payments over time if the CPI has an upward bias. In one year, the effect of the bias may not be much, but it will accumulate over time. Close to one third of federal government outlays are indexed to the CPI.
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To keep employees from shirking, invest in greater monitoring
a. if monitoring is inexpensive relative to its benefits b. especially when monitoring is not very efficient c. when employees respond well to incentive contracts d. when incentives solve both moral hazard and adverse selection problems with employees
The prisoners' dilemma is a game in which
A) the dominant strategy for all participants is the best outcome no matter what the other side does. B) the dominant strategy is to cooperate. C) only one of the firms is able to make above-normal profits. D) each firm, in making decisions on the basis of its own self-interest, also makes decisions that benefit the group as a whole.