If information is asymmetric, explain why the hire contract is not efficient in production and a moral hazard exists, but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem
What will be an ideal response?
With the hire contract, the agent has no incentive to behave in such a manner as to maximize the joint profit of the agent and the principal. The contract provides no incentive for the agent to behave optimally, and the contract does nothing to prevent moral hazard. The agent can usually increase his value of the contract by committing a moral hazard. The fixed fee to the principal contract gives the agent all the profit after the fee to the principal is paid. This provides an incentive for the agent to behave optimally and maximize the profit of the firm. The agent's desire to behave optimally prevents moral hazard.
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Refer to Figure 19-11. The graph above depicts supply and demand for British pounds during a trading day, where the quantity is millions of pounds. In order to support a fixed exchange rate of $2.00 per pound, the British central bank must
A) buy 0.6 million pounds per trading day. B) sell 1.2 million pounds per trading day. C) buy 1.2 million pounds per trading day. D) sell 0.6 million pounds per trading day.
Figure 9-2
Which of the following is true for the economy depicted in ?
a.
Potential output equals y1.
b.
It would be impossible for this economy to achieve an output greater than y1.
c.
When output y1 is achieved, the actual rate of unemployment will exceed the natural rate of unemployment.
d.
When output y1 is achieved, the actual rate of unemployment will be less than the natural rate of unemployment.