Explain why a firm may hire managers to operate outlets near the firm's headquarters, but may sell franchise rights for the outlets located greater distances from the headquarters
(With a franchise, the firm sells a brand name and a method of doing business to someone who then owns and operates the outlet.)
To avoid moral hazard problems, the firm must monitor the managers of the outlets. The firm can cost-effectively monitor operations near the headquarters. However, the cost of monitoring rises the farther away the outlet is located. Thus, the firm may earn more profit by franchising the outlets located far from the headquarters instead of trying to monitor them.
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When the prisoners follow their dominant strategy and confess, they will be worse off than if both had remained silent—hence, the "prisoners' dilemma."
a. True b. False Indicate whether the statement is true or false
If new firms are currently entering a perfectly competitive market, which of the following is true?
a. Existing firms are losing money. b. Existing firms are earning positive economic profits. c. Existing firms are just breaking even. d. Impossible to predict.