Scope of Services An apartment owner has contracted for lawn ...

[abern]

Scope of Services An apartment owner has contracted for lawn mowing services for a number of apartment complexes he owns. He negotiated a price per month but the scope of services to be performed remained a bit vague. Why is he disappointed that the winning contractor provides less than the desired level of services?

Question 2

Which of the following is an incorrect statement?
 a. If for an activity MR>MC, then do more of it
  b. An incentive compensation scheme that increases MR will increase effort
  c. Fixed fees have no effect on effort
  d. Average cost is relevant to an extent decision

[cascooper22]

Answer to Question 1

This is a moral hazard issue. Once the contract has been signed, the contractor has an incentive to exert as little effort as possible. So, for example, the lawn care service may not edge as often along a path that not much seen or that grows more slowly.

Answer to Question 2

d

[abern]

Thanks for the timely response, appreciate it

[mohan]

Excellent