will bring prestige to the department and the university.Should he be allowed to continu exclusively with research? Discuss with reference to the principal-agent problem. In the university context,the board of regents and its president are the principals,while the agents are the members of the faculty hired by the department with the approval of the president and the board.The dual purpose of most universities is teaching students and producing research: thus most faculty are hired to perform both tasks T problem teaching effort car monitored (particularly up for class).while the benefits of establishing a prestigious research reputation are uncertain and are realized only over time.While the quantity of research is easy to calculate.determining research guality is more difficult.The university should not simply regarding the tinue ex with his research without altering his payment scheme.One alternative would be to tell Jones that he does not have to teach if he is willing to accept a lower salary.On the other hand,the university could offer Jones a bonus if due to his research reputation.he is able to bring a lucrative grant or other donatior s to the niversity 5.Faced with a reputation for producing au omobiles with poor repair records a number of American companies have offered extensive guarantees to car purchasers (ie.,a seven-year warranty on all parts and labor associated with mechanical problems). In light of your knowledge of the lemons market,why is this a reasonable poliey? In the past,American companies enjoyed a reputation for producing high- ty cars.More ntly,faced Japanese ca manufacturers,their products appeared to customers to be of lower quality. As this reputation spread,customers were less willing to pay high prices for American cars.To reverse this trend,American companies invested in quality control.improving the repair records of their products Consumers however,still onsidered American carsto be of lower quality (lem some nse)and would not buy them,American s were fo rced t signal the improved quality of their products to their customers One way of providing this information is through improved warranties that directly address the issue of poor repair records.This was a reasonable reaction o the "lemons"problem that they faced. b. Is the policy likely to create a moral hazard problem?Explain. Moral hazard occurs when the insured party (here,the owner of an American automobile with an extensive warranty)can influence the probability of the event that triggers payment (here,the repair of the automobile).The coverage of all parts and labor associated withwill bring prestige to the department and the university. Should he be allowed to continue exclusively with research? Discuss with reference to the principal-agent problem. In the university context, the board of regents and its president are the principals, while the agents are the members of the faculty hired by the department with the approval of the president and the board. The dual purpose of most universities is teaching students and producing research; thus, most faculty are hired to perform both tasks. The problem is that teaching effort can be easily monitored (particularly if Jones does not show up for class), while the benefits of establishing a prestigious research reputation are uncertain and are realized only over time. While the quantity of research is easy to calculate, determining research quality is more difficult. The university should not simply take Jones’ word regarding the benefits of his research and allow him to continue exclusively with his research without altering his payment scheme. One alternative would be to tell Jones that he does not have to teach if he is willing to accept a lower salary. On the other hand, the university could offer Jones a bonus if, due to his research reputation, he is able to bring a lucrative grant or other donations to the university 5. Faced with a reputation for producing automobiles with poor repair records, a number of American companies have offered extensive guarantees to car purchasers (i.e., a seven-year warranty on all parts and labor associated with mechanical problems). a. In light of your knowledge of the lemons market, why is this a reasonable policy? In the past, American companies enjoyed a reputation for producing high-quality cars. More recently, faced with competition from Japanese car manufacturers, their products appeared to customers to be of lower quality. As this reputation spread, customers were less willing to pay high prices for American cars. To reverse this trend, American companies invested in quality control, improving the repair records of their products. Consumers, however, still considered American cars to be of lower quality (lemons, in some sense), and would not buy them, American companies were forced to signal the improved quality of their products to their customers. One way of providing this information is through improved warranties that directly address the issue of poor repair records. This was a reasonable reaction to the “lemons” problem that they faced. b. Is the policy likely to create a moral hazard problem? Explain. Moral hazard occurs when the insured party (here, the owner of an American automobile with an extensive warranty) can influence the probability of the event that triggers payment (here, the repair of the automobile). The coverage of all parts and labor associated with