When do firms pay efficiency wages? What is the relationship ...

[jasdeep_brar]

When do firms pay efficiency wages? What is the relationship between moral hazard and efficiency wages?
 
  What will be an ideal response?

Question 2

Trinh quits his 80,000-a-year job to become a full-time volunteer at a museum. What is the opportunity cost of his decision?
 
  A) the value he attributes to the joy of working at a museum
  B) depends on the going rate of museum employees
  C) at least 80,000
  D) 0 since he will no longer be earning a salary

[momtoalll]

Answer to Question 1

Moral hazard arises in a workplace when an employer (principal) either cannot observe the actions of his employees (agents) or it is prohibitively expensive to monitor employees. Paying efficiency wages is consistent with profit maximization in a world of asymmetric information. An employee has an incentive to shirk because he knows that it is difficult for his employer to monitor his behavior. By paying higher-than-equilibrium wages, an employer increases the opportunity cost of being fired from the job and so provides an incentive for employees to work hard.

Answer to Question 2

C