THE FIRM UNIT 6

Question 1

A firm is an organization which:

Answer 1

Pays wages (w) to employ people (L)

Purchases inputs (K, M, H)

To produce and market goods and services (Q) with the intention to

Make a profit ()

Question 2

Why is the contract incomplete between managers and workers:

Answer 2

The manager does not know precisely how the employee will contribute

Worker effort is unobservable

Question 3

Incomplete contract

Answer 3

a contract that cannot enforce everything the firm and the worker care about( eg effort, attitude, working hours and emergencies)

Question 4

Why creating the employment rent (ER) for workers is important to managers:

Answer 4

The worker is more likely to stay in the firm

The threat to fire a low-effort worker is credible

Question 5

A more realistic option:

Answer 5

pay the reservation wage + an employment rent

Question 6

The owner’s maximization problem:

Answer 6

Maximize the level of effort for the given costs of effort or minimize the costs, given the feasible effort