Question

1. Suppose a new contracting environment with an economic environment that looks more uncertain is considered. This new contract will result in:

   		an increase in the marginal cost and a longer optimal contract.
   		an increase in the marginal cost and a shorter optimal contract.
   		a decrease in the marginal cost and a longer optimal contract.
   		a decrease in the marginal cost and a shorter optimal contract.

2. An increase in the marginal cost arising from a more complex specialized investment environment will cause the optimal contract length to:

   		increase.
   		decrease.
   		remain constant.
   		either increase or decrease.

3. Long-term contracts become shorter:

   		when specialized investment becomes less important.
   		when the exchange environment is less complex.
   		when spot markets work poorly.
   		when marginal costs are increasing.

4. A decrease in the marginal cost arising from a less complex specialized investment environment will cause the optimal contract length to:

   		increase.
   		decrease.
   		remain constant.
   		either increase or decrease.

5. The activity known as shirking is LEAST likely to occur when:

   		workers are not monitored.
   		the earnings of a worker are closely tied to the worker's output.
   		all workers are paid the same wage rate.
   		firm ownership is separated from the managerial control.

Answer 1

1) Solution: an increase in the marginal cost and a shorter optimal contract
Explanation: An uncertain economic environment in an new contracting environment will cause a decrease in the optimal contract
2) Solution: decrease
Explanation: A rise in the marginal gain arising from a specialized investment will lead to a decrease in the optimal contract length while an increase in the marginal cost from a specialized investment will lead to a rise in the optimal contract length
3) Solution: when specialized investment becomes less important.
Explanation: When the specialized investment is not much significant it causes a shorter long-term contract
4) Solution: increase
Explanation: A rise in the marginal cost due to more complex specialized investment environment will lead to a shorter optimal contract length while a fall in in the marginal cost will lead to a longer optimal contract
5) Solution: the earnings of a worker are closely tied to the worker's output
Explanation: If the worker's earning are tied closely to the output of worker’s will les likely cause shirking