Q1. (2 points)

Peter was recently hired as a salesman for a national consulting firm. His job involves spending a significant portion of his time out of the office visiting prospects and attending conferences. Which of the following is a strategy the consulting firm may employ to discourage Peter from shirking his responsibilities? ... ( )

a. Tell Peter that the shareholders want to earn a large profit this year

b. Pay Peter commissions on what he sells after the work has been completed

c. Allow Peter to set his own schedule and work from home frequently

d. Pay Peter a lower wage than he would earn in a similar job at another firm

Q2. (2 points)

When a jeweler sells a low quality diamond to a young man who believes the diamond is the highest quality, she is engaging in ... ( )

a. both moral hazard and adverse selection

b. neither moral hazard nor adverse selection

c. moral hazard, but not adverse selection

d. adverse selection, but not moral hazard

Q3. (2 points)

A benevolent social planner would prefer that the output of good X be increased from its current level if _____________ at the current level of output of good X. What would be the correct equalities and inequalities that fit the blank above? ... ( )

a. social value = private value = private cost

b. social cost > private value = social value > private cost

c. social cost = private cost = private value

d. social value = private cost = social cost > private value

Q4. (5 points)

The following table shows the private value, private cost, and external cost for various quantities of output in a market. With all the information given, answer the following questions Q4-A ~ Q4-D.

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