An Efficiency Wage Premium Serves the Same Function as a Bond

question 10

Multiple Choice

An efficiency wage premium serves the same function as a bond because,just as with a bond,the premium represents

• A) the amount the employee loses if caught shirking.
• B) the expected value of the amount the employee loses if he shirks.
• C) the cost of monitoring the employee.
• D) the gain to the employee if he shirks.

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Definitions:

Externalities

Economic side effects or by-products that affect an uninvolved third party; can be either positive or negative.

Public Goods

Items that are non-excludable and non-rivalrous, meaning they can be enjoyed by everyone, regardless of whether they contribute to their provision.

Protective Function

Activities carried out by the government to safeguard the economy and its agents, such as regulation and enforcement.

Government

The organization, or system, by which a community or nation is governed, typically involving institutions and practices of authority.