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.)
What will be an ideal response?
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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The figure above shows the market for the chemical hydrogen sulfide, the production of which creates an external cost. The government imposes the pollution tax shown in the above figure. What quantity is produced after the pollution tax is imposed?
A) zero pounds B) 80 million pounds C) 160 million pounds D) more than 160 million pounds E) more than 80 million pounds and less than 160 million pounds
The "rate of return" refers to:
a. the increase in future output made possible by investing one unit of current output in capital accumulation. b. the dividend payments made on corporate issued stock. c. the increase in current output made possible by investing in units of future output in capital accumulation. d. the rate at which capital depreciates.