Please use the note provided below to answer the following questions. A minimum of one paragraph answerperquestion is expected. Failure to answer questions thoroughlywillresult in partial/no credit. Do not use Chat GPT's answer because it needs to relate to the concepts from the textbook.

3Why might some managers want price controls? Why wouldn't they get together and control prices themselves (if such price controls were legal)?

4How could price controls affect a firm's incentive to innovate? Explain.

9 Explain how a reputation for "honest dealing" on the part of executives can elevate a company's stock.

10 Why do many consumers pay extra for goods with "brand names"? Conceptually speaking, how much should firms spend on "branding" their products?

The key takeaways from Chapter 4 are the following:

1 The market system can perform the very valuable service of rationing scarce resources among those who want them; however, markets are not always permitted to operate unobstructed. Government has objectives of its own, objectives that are determined collectively rather than individually. This fact has important implications for the types and the efficiency of policies that are selected (a topic to which we return again and again in this book).

2 Excise taxes, under normal market conditions, tend to be passed on only partially to consumers, meaning producers often pay a portion of the tax in the form of a lower after-tax price. How the tax is shared between buyers and sellers depends upon the elasticity of supply and demand.

3 Price and rent controls - "price ceilings" - tend to result in shortages. They also tend to result in costs being passed along to buyers in various ways and tend to result in a reduction in the quality of whatever good's price is subject to control.

4 Firms offer fringe benefits because they pay. They can increase costs, but they can also increase productivity and increase the market supply of labor wanting to work where fringe benefits are offered, which can result in a lower market wage rate.

5 With a fringe benefit provided, workers can be better off in spite of the lower wage rate because the value of the benefit to workers exceeds the value of the lost money wages. The employers can be better off because the wage reduction caused by the increase in the worker supply can be greater than the cost of the benefit to employers.

6 Fringe benefits will tend not to be offered unless they are mutually beneficial to workers and employers.

7 The provision of fringe benefits will be extended until the additional value to employees of the last unit equals the additional cost of the fringe benefit to employers.

8 Minimum-wage laws - and other "price floors" - tend to result in market surpluses. However, such surpluses enable employers to offset at least partially the employment effects of minimum wages by reducing fringe benefits or increasing work demands.

9 When a minimum wage is imposed, both workers and employers can be worse off. Employers can be worse off because the higher wage exceeds the possible cost reductions from fringe benefits being taken away and/or the productivity gains from the imposition of greater work demands on employees. Workers can be worse off because the value of the loss of fringe benefits and the greater work demands imposed can exceed the higher wage rate.

10 Honesty in business has both a moral and an economic dimension. Honesty is an economic force because it can pay.

11 "Hostages" (or "assets" bought by firms that increase the credibility of managers' commitment) can be "self-financing," in the sense that they can reduce the transaction costs of making and fulfilling business deals. Hence, if judiciously used, "hostages" can increase firms' profitability and stock prices.

Chapter 4 Key Terms

Price ceilingAprice ceilingis a government-determined price above which a specified good cannot be sold.

Price floorAprice flooris a government-determined price (or wage) below which a specified good (labor) cannot be sold.

Moral hazardAmoral hazardis the tendency of behavior to change after contracts are signed, resulting in unfavorable outcomes from the use of a good or service.

Adverse selectionis the tendency of people with characteristics undesirable to sellers to buy a good or service from those sellers.

HostageAhostageis something of value to the seller that customers can destroy by taking their business elsewhere if the seller does not keep her promises.