1. There are a lot of reasons and mistakes that led Enron to bankruptcy. The main problem
was that Enron hired too young accountants and inexperienced managers and trusted them
his finance without additional control to lower the risks of making mistakes. He let his workers
make fundamental decisions that lead to huge mistakes. The other problem was that Enron
invested his money to the companies that had no potential for further development. He also
decided to compensate money to his top performers, which was a big risk. Overall, Enron
made a lot of wrong decisions that cost him a lot at the end. Enron’s bankruptcy became a
historical moment that people still remember.
2. The three critical aspects of corporate organizations are the assignment of decision rights
within the company, the methods of rewarding individuals, the structure of systems to
evaluate the performance of both individuals and business units.
Each firm is unique and the aspect that we should imply in order to succeed depends on the
firm itself. It seems that the assignment of decision rights is likely to be most important for
the success of a firm but personally, I believe that the most important aspect is the
methods of rewarding individuals. As an example, we can consider models of behavior,
where usually people are dependent on the atmosphere or the feedback they receive. If we
will reward our employees than they will be more productive than before. It will motivate
them to do a better job and make the company more successful.
3. Overstated income was the way how risky borrowers cheated on housing loans. Fraudulent
borrowers created the group and recruited people to apply for big loans by giving wrong information
about their incomes, find homes of the appraisers to higher the price, pay lower prices sellers for the
houses that cost more and pocket the difference that would later be spread between the members of
the group.
4. The main reason why liar loans began to proliferate is that all the organizations that provide
loans require too high standards for their customers. It becomes a reason for people to lie
about their incomes in order to get a loan. From the example mentioned in the book, in Atlanta
in order to receive a $1.8 million loan, the borrower stated that his family’s annual income
was $600 000. In fact, his annual income was estimated at $105 000. In my opinion, it is too
hard for people to fit those standards and they are forced to lie about their salaries and job
positions.
5. I think that there is a relationship between a CEO’s retirement and R&D expenses in a firm.
From the book, I understood that in many cases CEO reduces the R&D expenses two years
or more before the retirement to boost the earnings. If the CEO’s bonuses are linked to
earnings, then the CEO retires with a big amount of earnings reduced from R&D. Years after
the CEO is gone firm will suffer failures because of no new products on stream and failures of
keeping up with innovation.
1. The economic model explains that employees are more likely to react to the incentives and
not on the atmosphere. An economist is more likely to be skeptical about the quality of the
workplace and feelings of people as a part of a company’s way to motivate employees.
2. Whether to buy or not to buy a new car depends on if she needs it. Opportunity cost means
making a particular valuable choice between all the given alternative options. The answer
to this question depends on the opportunity cost of the car she wants to buy.
3. The amount of soda is recorded on the horizontal axis and pasta is measured along the
vertical axis. Jim’s budget shown across the horizontal axis is shifted by a decrease in the
cost of soda. The highest curve drawn on the graph shows his latest decision of having
more soda. Because of the price change, Jim changes his decision about the amount of
purchase he is willing to make. As any other consumer Jim reacts to price incentives.
Consumers require higher quantities at reduced prices. He may choose to eat more of both
pasta and soda, depending on the place of the indifference curve.
4. (A)
(B) There’s no change in his budget constraint. The new vertical line is the same as the old
one consisting of 50 bottles of water. The new horizontal line is the same as the previous
consisting of 10 concerts. Celtic concerts’ relative price is always 5 bottles of Celtic
Springs Water. In April, he consumes 5 Celtic concerts and 25 Celtic Spring Water bottles.
5. (A) In 2008, he may spend $10,000, but if he consumes in 2009, he may spend
(1+0.10)*10,000=(1.10)*10,000 or $11,000 in 2009.
