Question 1

choice a. A labour contract transfers ownership of the employee from the employee to the employer.
choice b. The office where the employee works is a relation-specific asset, because the employee cannot use it after leaving the firm.
choice c. In a labour contract, one side of the contract has the power to issue orders to the other side, but this power is absent from a sale contract.
choice d. A firm is a structure that involves decentralization of power to the employees.

Question 2

Which of the following statements about the separation of ownership and control is true?

choice a. When the ownership and control of a firm is separated, the managers become the residual claimants.
choice b. Managers always work to maximize the firm’s profit.
choice c. One way to address the problem associated with the separation of ownership and control is to pay the managers a salary that depends on the performance of the firm’s share price.
choice d. It is effective for shareholders to monitor the performance of the management, in a firm owned by a large number of shareholders.

choice a. The firm cannot contract an employee not to leave.
choice b. The firm cannot specify every eventuality in a contract.
choice c. The firm is unable to observe exactly how an employee is fulfilling the contract.
choice d. all of the above

Consider Figure 1 for Maria and calcuate her employment rent per week (she works 35 hours a week).

Figure 1. Shows employment rent (per week)

Maria earns $12 per hour in her current job and works 35 hours a week. Her disutility of effort is equivalent to a cost of $2 per hour of work. If she loses her job, she will receive unemployment benefit equivalent to $6 per hour. Additionally, being unemployed has psychological and social costs equivalent to $1 per hour. Then:

choice a. The employment rent per hour is $3.
choice b. Maria’s reservation wage is $6 per hour.
choice c. Maria’s employment rent if she can get another job with the same wage rate after 44 weeks of being unemployed is $6,160.
choice d. Maria’s employment rent after 44 weeks of being unemployed is $7,700.

Consider the best response function for this question. Which of the following statements is correct?

Figure 2. Maria’s best response

choice a. If the expected unemployment duration increased to 50 weeks, Maria’s best response to a wage of $12 would be an effort level above 0.5.
choice b. If the unemployment benefit was reduced, then Maria’s reservation wage would be higher than $6.
choice c. Over the range of wages shown in the figure, there is a point such that Maria exerts the maximum possible effort per hour (effort = 1).
choice d. Increasing effort from 0.5 to 0.6 requires a bigger wage increase than increasing effort from 0.8 to 0.9.

The figure on this slide puts the employer’s isocost curve and Maria’s best response curve together. The figure states that

Figure 3. The isocost line and Maria’s best response curve together

choice a. The equlibrium point is A, where the wage offer is $12 and effort exerted by Maria is 0.5
choice b. The ratio if $e/w$, efficiency per dollor, is constant over the isocost line.
choice c. The ratio if $e/w$, efficiency per dollor, increases as the wage offer increase over the isocost line.
choice d. both a and b