Chapter 7 – 20 points
3. Explain why even conscientious workers will shirk more when the cost of shirking falls.
As long as shirking provides utility to a person (Do longer coffee breaks provide utility? Does working at less than full capacity provide utility? Does working a little less hard and daydreaming a little more provide utility?), then a fall in the cost of shirking will cause even a hard and conscientious worker to shirk more. This is based on the idea that individuals are utility maximizers who will not turn their backs on a way to obtain more utility. Saying even hard and conscientious workers will shirk more when the cost of shirking falls is not saying that such persons are bad, immoral, or deserving of reprimand. It simply acknowledges the fact that utility-maximizing individuals respond to a change in costs relative to benefits.
(5 points)
4. What does the phrase “separation of ownership from control” refer to?
It refers to the owners of the firm not being the persons who control the firm or manage it on a daily basis. The connotation here is that where ownership is separated from control the managers (or controllers) of the firm will sacrifice meeting the objectives of the owners of the firm to meeting their own objectives.
(5 points)
1. Give a numerical example that illustrates lost output due to shirking.
Suppose that Joan and Jett can each produce 10 units of good X per hour. They work a nine-hour shift with an hour off for lunch from noon to 1 p.m. In their eight working hours, Joan and Jett each produce 80 units, for 160 units total. After working for a few weeks, they realize that their supervisor is there all day, except that she takes lunch from 1 p.m. to 2 p.m. and they are unsupervised. Joan and Jett shirk for the hour their supervisor is at lunch. Output falls to 70 units of production each, and 140 units per day total.
(5 points)
3. If you had to define residual claimant with numbers (and the minimum of words), how would you define it?
TR = $1,000, TC = $900, and profit = $100. Smith, a residual claimant, gets the $100.
(5 points)