Author Question: When import restrictions are placed on a good, and as a result the price of the good increases, the ... (Read 59 times)

SO00 · **on:** Jul 1, 2018

When import restrictions are placed on a good, and as a result the price of the good increases, the demand curve for that good will

A) shift rightward.
B) shift leftward.
C) become steeper.
D) be unaffected.

Question 2

If information is asymmetric, explain why the hire contract is not efficient in production and a moral hazard exists, but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem.

What will be an ideal response?

matt95 · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

D

Answer to Question 2

With the hire contract, the agent has no incentive to behave in such a manner as to maximize the joint profit of the agent and the principal. The contract provides no incentive for the agent to behave optimally, and the contract does nothing to prevent moral hazard. The agent can usually increase his value of the contract by committing a moral hazard. The fixed fee to the principal contract gives the agent all the profit after the fee to the principal is paid. This provides an incentive for the agent to behave optimally and maximize the profit of the firm. The agent's desire to behave optimally prevents moral hazard.