Suppose the probability of an employee being caught shirking, q, ...

[captainjonesify]

Suppose the probability of an employee being caught shirking, q, is a function of the employer's monitoring, M, such that q = M/100. If workers must put up a 1,000 bond and the gain to each worker from shirking is 100, what is the employer's optimal level of monitoring that is just sufficient to discourage shirking?
 
  What will be an ideal response?

Question 2

Explain why a firm may hire managers to operate outlets near the firm's headquarters, but may sell franchise rights for the outlets located greater distances from the headquarters. (With a franchise, the firm sells a brand name and a method of doing business to someone who then owns and operates the outlet.)
 
  What will be an ideal response?

[31809pancho]

Answer to Question 1

Workers are deterred from shirking if q = G/B = 0.10. Ten units of monitoring are necessary to achieve q = 0.10.

Answer to Question 2

To avoid moral hazard problems, the firm must monitor the managers of the outlets. The firm can cost-effectively monitor operations near the headquarters. However, the cost of monitoring rises the farther away the outlet is located. Thus, the firm may earn more profit by franchising the outlets located far from the headquarters instead of trying to monitor them.