Assume D1 represents the current demand curve for skis. Which of the following would
most likely cause D1 to shift to D2?
A. An increase in the price of snowboards
B. A decrease in the price snowboards
C. A decrease in the price of skis
D. An increase in the price of skis
If Larry starts a new pizza parlor and hires a manager for $30,000 per year, this implies
that
A. pizza parlor managers are inexpensive to hire.
B. Larry values his labor at less than $30,000 per year.
C. Larry values his labor at more than $30,000 per year.
D. the price of pizza will increase if Larry works in the parlor himself.
Fast food is believed to be an inferior good. This means that
A. the quantity of fast food consumed decreases as income increases.
B. the income elasticity of demand for fast food is positive.
C. the quantity of fast food consumed will always be high.
D. the quantity of fast food supplied decreases as income increases.
Which one of the following is a big problem in large groups?
A. Useless group leader
B. Adverse selection problem
C. Free-rider problem
D. Buyer-supplier conflicts
Susan Chen is a stock analyst. She values two goods: money (income) and her integrity.
Her bonus is based on the number of investments she recommends to the company.
Generally speaking, the higher the bonus she receives,
A. the more she is willing to trade off her integrity for money.
B. the less she is willing to trade off her integrity for money.
C. the smaller is the shift in her budget line.
D. the more she is indifferent to changes in the level of bonus.
If the price of a variable input increases, then
A. the total cost curve will shift up.
B. the average total cost curve will shift down.
C. the marginal cost curve will shift down.
D. the fixed cost curve will shift up.
AutoCorp is a reputed automobile manufacturer while SUVmart is an independent
distributor who buys automobiles from the former. During the current year, SUVmart
wants to buy its quota of 250 Rhinos from AutoCorp. For the quota system to work
efficiently, AutoCorp must commit credibly to the:
A. exclusive territory.
B. double markup.
C. retail price.
D. wholesale price.
Between 1971 and 1991, more than _________ federal lawsuits were filed.
A. 10 million
B. 6 million
C. 3 million
D. 4 million
The expected level of shirking or opportunistic behavior by an agent:
A. can always be determined accurately.
B. is always less than zero.
C. is always zero.
D. is always greater than zero.
Assume the current market price of candles is such that there is a surplus (i.e., excess
supply). Which of the following best describes the adjustment process in a competitive
market?
A. As the price increases, the quantity demanded and the quantity supplied decrease.
B. As the price increases, the quantity demanded decreases while the quantity supplied
increases.
C. As the price decreases, the quantity demanded increases while the quantity supplied
decreases.
D. As the price decreases, the quantity demanded decreases while the quantity supplied
increases.
Assume the demand function for skin care products is given by Q = 1,000 – 20 P + 5I.
If P = $25 and I = $1,000 currently, then
A. skin care products are normal goods.
B. the elasticity of demand is equal to 11.
C. skin care products are inferior goods.
D. the elasticity of demand is equal to 10.
When a firm establishes a long-term contract with another firm whereby it acquires an
asset such as a machine or a building through a rental agreement, it is called a:
A. standard supply contract.
B. joint venture.
C. lease contract.
D. franchise agreement.
Assume that the quantity of CDs is measured on the horizontal axis, while the quantity
of movie tickets is measured on the vertical axis. If available income decreases, then
A. the horizontal intercept of the budget line decreases, while the vertical intercept
remains unchanged.
B. the vertical intercept of the budget line decreases, while the horizontal intercept
remains unchanged.
C. the budget line will shift inward.
D. the budget line will shift outward.
Though Nash games are noncooperative, a cooperative outcome is more likely if
A. the long-run gains are greater than the short-run gains.
B. firms can easily monitor the outcomes from rivals’ defection.
C. firms expect the market relationship to last only for a short time.
D. the long-run gains are smaller than the short-run gains.
When a management successfully implements innovations, it usually makes more than
one change in the corporation’s organizational structure. It is important to remember
that the changes are:
A. dysfunctional.
B. substitutes for one another.
C. complementary.
D. reversible
In a situation where customers will never be seen again:
A. economies of scale are common.
B. sellers are likely to cheat on price or quality.
C. supply bottlenecks and shortages are likely to arise.
D. increased honesty in transactions is common.
Markets use prices to allocate resources, while firms use:
A. cost-price ratios.
B. managers.
C. the board of directors.
D. random decisions.
Robinson pays $100 for tickets to see his favorite sports team play. With 10 minutes left
in the game, his team is losing heavily and has no chance of winning the game.
Robinson chooses to stay until the end of the game because he wants to get the full
value for his admission price. As an economist, you should advise Robinson to
A. stay until the end of the game as his intuition is correct.
B. stay until the end of the game as he might be heckled on the way out.
C. leave the game if his marginal benefit of leaving is greater than marginal cost, as the
admission price is a sunk cost.
D. leave the game now as the line to exit the stadium is shorter now.
The key mission that most economists ascribe to a firm’s managers is to:
A. maintain ethical behavior.
B. follow all regulations.
C. maximize the value of the firm.
D. hire a large number of employees.
Which of the following is true of matrix organizations?
A. Employees are more likely to focus on the overall business process rather than on
their functional specialty.
B. Employees have strong incentives to cooperate with other teams within a company.
C. Influence costs are low as there are separate product and functional managers.
D. There are well-defined lines of authority, eliminating scope of interdependence and
lack of incentives.
To say that a management proposal has distributional consequences means that: A.
warehouses will be overstocked if it is ratified and implemented.
B. it will disrupt the company’s current distribution and marketing channels.
C. it will benefit some managers and harm others if implemented.
D. dividends will no longer be paid on the stock each quarter if it is implemented.
If transaction costs can be reduced in a marketplace, then total producer and consumer
surplus will
A. increase.
B. stay the same.
C. decrease.
D. increase first and then decrease.
______ extracts the maximum amount each customer is willing to pay for a product.
A. Personalized pricing
B. Group Pricing
C. Two-part tariff
D. Bundling
From Jerome Kerviel’s actions in Socit Gnrale, we realize that in a business
organization, managers may turn a blind eye to certain “red flags” in the system if
A. the managers themselves conduct certain illegal activities.
B. the managers know that at some point these illegal activities will fail.
C. the managers believe that no worker will unnecessarily expose himself or herself.
D. the managers embrace risk taking as long as it benefits the company.
Currently XYZ’s compensation system is such that only top managers receive
compensation based on the company’s performance, while everybody else in the
company receives a fixed salary. Moreover, top managers have full discretion over the
launch of new products. Due to the failure of the last three products launched by XYZ,
top managers are contemplating modifying the allocation of decision rights concerning
new products. What changes would make more economic sense?
A. Delegating decision rights down the ladder to those employees who are likely to
have more specific knowledge and leaving their current compensation scheme
unchanged
B. Delegating decision rights down the ladder to those employees who are likely to
have more specific knowledge and changing their compensation by awarding them
bonuses based on their performance
C. Leaving the allocation of decision rights unchanged, but changing the compensation
of all the employees by awarding them bonuses based on their performance
D. Giving themselves good bonuses and reducing benefits for all other employees
Which of the following is a feature of a behavioral economic model?
A. It focuses on cognitive, emotional, and social factors that affect individual decisions.
B. It considers incentives an unimportant tool to study human behavior.
C. It suggests that individuals always behave rationally.
D. It is based on marginal analysis in decision making.
Defense, construction, and management consulting are usually set up as:
A. M forms of business organizations.
B. U forms of business organizations.
C. network designs.
D. matrix designs.
For a given compensation potential (isocost curve), an employee with a large family is
more likely to pick a wage-benefit mix that emphasizes:
A. wages.
B. incentive piece rates.
C. risk-averse commission plans.
D. fringe benefits.
Refer to Figure 9.5.
If the bus companies can expect to bid for contracts every 6–12 months for new buses,
then the outcome may shift to
A. GMB—High, VolgaBus—High.
B. GMB—Low, VolgaBus—High.
C. GMB—High, VolgaBus—Low.
D. GMB—Low, VolgaBus—Low.
The use of hierarchies is common in modern corporations:
A. because of the principle of comparative advantage.
B. because of the principle of separation of decision management and decision control.
C. to avoid collective-action problems.
D. to enhance employee buy-in.
Which of the following is a key factor that encouraged companies to focus on total
quality management in the mid-1980s?
A. Expansion of worldwide competition
B. A fall in the cost of labor
C. An increase in the supply of skilled labor force
D. Enforcement of property rights
What is the relation between value creation and transactions cost?
Always Round Tire hires Plain Truth Advertising to write copy for its newspaper
advertisements. Always Round has a demand for advertising of MB = 400 − 2S where S
is the number of hours that Plain Truth works. If Plain Truth has a fixed supply cost
given by MC = $150 per hour, what are the number of hours that Always Round
purchases from Plain Truth under the assumption of costless monitoring? How much is
the contract worth to Always Round? If Always Round offers half of the surplus to
Plain Truth as an incentive, how much is Plain Truth paid for the job?
Give examples of block pricing, bundling, price discrimination and two-part tariffs.
If demand is represented by Qd = 50 – 0.5P + 0.005I where I = $50,000 and supply is
represented by Qs = 100 + 0.4P -2W where wages (W) = $15.00, compute the
equilibrium price and quantity. What happens if income falls to I = $40,000?
In this chapter, the discussion on competitive markets tells us that each firm’s demand
curve is horizontal. Is this not inconsistent with the industry’s demand curve, which
slopes downward?
Draw a profit/price trade-off curve that is the result of moving from a competitive to a
monopoly industry organization. Show the equilibrium position for the regulator with a
political support function (PS curve). What can we say about prices and profits of the
regulated industry if it started as a competitive industry?
There are four structural components to a perfectly competitive market. Which one of
the four components is the most important to market operation and why?
Economist Milton Friedman argued that the goal of corporations should be “to make as
much money for its owners as possible while conforming to the basic rules of society.”
What does this mean in terms of corporate ethical behavior?
In the case study at the end of Chapter 20, Global Insurance is a company that offers
disability insurance. Its major problem is that it does not process policies very quickly,
largely because it is not computerized and the process is not linked electronically. The
CEO wishes to innovate and to change organizational architecture to computerize and
link all phases of the application process. What aspects of leadership need to be
emphasized during this difficult transition at Global?
In 2003, conservation groups paid western cattlemen to move their herds away from
wild buffalo herds so that the buffalo would have more feed and not have to compete
with the cattle. What has this got to do with regulation and the Coase Theorem?
In 2003, Sony Corporation announced reform in its management structure. The reform
included an increase in the number of outside directors on the Board of Directors, a
requirement to separate the Chairman of the Board from the CEO, and greater inclusion
of outside directors on the Nomination Committee. Analyze these changes from the
perspective of separation of decision control from decision management.
Since the Internet became a common tool for business, employees at Plain Truth
Advertising have maintained a semi-secret website where wages of employees are
published and comparative salaries of friends at other advertising agencies are also
published. Employees at Plain Truth have noticed that wage dispersion of similarly
ranked employees has shrunk dramatically in the past five years. What happened?
Give a few examples of incentive compensation.
What are the key managerial insights derived from game theory? Which one is the most
important?
Separation of ownership from control clearly expands the potential for principal/agent
conflict. Why don’t large corporations fail in large numbers because of this conflict?
A monopoly’s demand curve is P = 200 – 3Q and its MC = $20. How many customers
should this company serve? What is the price paid by each customer? What will be the
company’s gross revenue in this venture?