Fama and Jensen suggest that “the form of organization that survives in an activity is
the one that delivers the product demanded by customers at the lowest price while
covering costs.” This is an example of
A. market and organizational efficiency.
B. market and organizational equity.
C. economic benchmarking.
D. defective organizational architecture.
Which one of the following is a source of conflict between owners and managers?
A. Managers and owners have a very short time horizon.
B. Managers and owners worry about the entire future cash flows.
C. Managers have short time horizons, while owners have to worry about future cash
flows.
D. Owners have short time horizons, while managers have to worry about future cash
flows.
Suppose a family’s budget line is such that the horizontal axis shows the amount of food
consumed, while the vertical axis measures the consumption of all other goods.
Suppose this family receives food stamps. This will cause the budget line to
A. rotate leftward along the vertical axis.
B. pivot along the horizontal axis.
C. shift rightward along the horizontal axis.
D. shift leftward.
Which of these is a drawback of forming an internal reference group and using the
group average to assess normal performance?
A. High influence cost incurred by employees
B. Forced distributions
C. Shirking among supervisors
D. Explicit employee collusion that tends to hold down the benchmark
Always Round Tire finds the following cross elasticity:
(a) Demand for tires/price of batteries = 0.45.
(b) Demand for tires/price of brake jobs = −0.70.
(c) Demand for tires/price of an oil change = 0.002.
Discuss how the pricing of batteries, brakes, and oil changes will affect the sales of
tires.
The case of the Kodak – IBM outsourcing agreement for payroll software indicates that
______ can cause significant long-term holdup problems.
A. competitive markets
B. technological change
C. specific assets
D. quality control issues
Closely held corporations are characterized by:
A. a small number of shareholders, each holding on to lots of shares for a long time.
B. a large number of shareholders, each holding on to a few shares for a long time.
C. stock that is freely traded only among a few shareholders.
D. stock that is not freely traded and often held by a few shareholders.
Price elasticity is defined as the change in quantity demanded relative to a change in
A. the price of substitute products.
B. consumer income.
C. the price of complementary products.
D. the price of the product.
Under what market structure do we have strategic play?
A. Perfect Competition
B. Monopoly
C. Monopolistic Competition
D. Oligopoly
Which one of the following is a source of organizational power?
A. Vision setting
B. Risk appetite
C. Work experience
D. Formal authority
In the benchmark competitive case, the firm will expand the hiring of employees until
the marginal revenue product is:
A. less than the market wage rate.
B. equal to the market wage rate.
C. greater than the market wage rate.
D. the square of the market wage rate.
Negotiations and binding contracts are not possible between rivals in
A. noncooperative games.
B. cooperative games.
C. perfect competition
D. single-firm monopolies.
The ______ of an uncertain payoff is defined as the weighted average of all possible
outcomes, where the probability of each outcome is used as the weights.
A. expected value
B. standard deviation
C. variance
D. skewness
Economic Darwinism is seen when
A. organizational architecture is optimized by employing new technology.
B. competition weeds out ill-designed organizations that fail to adapt.
C. corporate mutations occur, like Enron.
D. market benchmarks are employed.
Which of the following is not a problem in owner-manager or principal-agent conflicts?
A. Choice of effort
B. Perquisite taking
C. Identical time horizons
D. Differential risk exposure
Setting performance goals based on historical data and past performance creates:
A. the horizon problem.
B. a compensating differential.
C. opportunism.
D. a ratchet effect.
Assume the demand function for SeatComfy’s table chairs is Q = 5,000 – 25P + 4I
+10PA – 15PT. Moreover, assume that currently P = 10, PA = 15, I = 500, PT = 100.
Which of the following is true?
A. If SeatComfy increases its price by 1 percent, sales as well as total revenues will
increase.
B. If SeatComfy decreases its price by 1 percent, sales will increase, while total
revenues will decrease.
C. If SeatComfy increases its price by 1 percent, sales will decrease, while total
revenues will increase.
D. If SeatComfy increases its price by 1 percent, sales as well as total revenues will
decrease.
In the TruLite boxing department, management finds that the production team
maintains several boxes of lights in a nearby storage closet. On days when the assembly
line breaks down, the boxes are added back at the end of day to meet production goals.
This is an example of:
A. beating the benchmark.
B. gaming the production system.
C. random elements in production.
D. risk premium adjustment factors.
Mary Jo Smith is willing to work for $3,200 per month. She asks the HR manager at
Plain Truth Advertising for $4,000 per month. He was willing to pay only $3,700 per
month, so he rejects her application and begins to search for a new employee again.
This is an example of:
A. adverse selection.
B. value maximization.
C. bargaining failure.
D. agency problem.
Information asymmetries between producers or consumers along with the problems of
externalities can:
A. cause market failure.
B. always be solved by alternative dispute resolution (ADR) mechanisms.
C. improve free trade.
D. restrict the use of property rights in a market economy.
When a firm establishes a long-term contract with another firm that is characterized by
common ownership of a supplier with another firm, it is referred to as a:
A. standard supply contract.
B. joint venture.
C. lease contract.
D. franchise agreement.
Price elasticity of demand tells us the responsiveness of
A. quantity demanded to a change in the price of a substitute good.
B. quantity demanded to a change in quantity supplied of a good.
C. price to a 1 percent change in quantity demanded.
D. quantity demanded to a 1 percent change in price.
O’Roberts receives a cash prize of $3,000 and is trying to decide how much money to
invest at an interest rate of 5 percent and how much to spend now. Consider his
intertemporal budget constraint where future interest income is measured on the vertical
axis. If the interest rate were 7 percent instead, his budget constraint would
A. rotate inward along the vertical axis.
B. rotate inward along the horizontal axis.
C. rotate outward along the vertical axis.
D. rotate outward along the horizontal axis.
The cost plus pricing formula tends to ignore
A. incremental costs.
B. customer quantity sensitivity.
C. fixed costs.
D. quotas.
Which of the following is a reason for firms to bundle products?
A. To extract additional profit from a customer base with heterogeneous product
demand
B. To extract additional profit by charging higher prices for the goods in a bundle
C. To clear the old stock of the product
D. To increase customer welfare and satisfaction
In developed countries, the enforcement of contracts and the adjudication of contract
disputes through the court system:
A. reduces the volume of international trade.
B. lowers the comparative advantage enjoyed by producers.
C. is an important way to reduce transaction costs.
D. weakens the system of property rights.
The simple case of pricing with market power assumes that (a) all consumers are
charged the same price, (b) the firm sells one product, and (c) demand exists in one time
period. Discuss what happens when each assumption is relaxed.
If an employee is paid a fixed wage in a production environment where the wage is
independent of output, then the employee has an incentive to:
A. maximize output.
B. shirk.
C. innovate.
D. search for methods to overcome random elements in production.
Suppose two firms agree to set a single high price for their products and reap high
profits. What is a potential problem here?
A. One firm is afraid that its profit might fall drastically since it might secretly cut
price.
B. One firm is afraid that its profit might fall drastically since the other might secretly
cut price.
C. One firm is afraid that its profit might fall drastically since the other might raise
price.
D. One firm is afraid that its profit might fall drastically since oil prices may go up.
The key to understanding changing organizational architecture is that:
A. it is costless.
B. there are only direct costs.
C. there are only indirect costs.
D. there are direct and indirect costs.
Refer to Figure 23.1. If the rule is to keep increasing quality until the incremental costs
are greater than the new sales, then this firm should stop at:
A. Level I.
B. Level II.
C. Level III.
D. Total Quality.
Which of the following statements about the average total cost curve is false?
A. It is initially downward sloping because increases in quantity make the average fixed
cost smaller.
B. It eventually becomes upward sloping because the law of diminishing returns sets in.
C. It is always downward sloping because the average fixed costs will always decrease
as quantity increases.
D. The marginal cost curve crosses the average total cost curve at the point at which
average total cost is minimized.
If employees’ activities follow the economists’ view of behavior, managers will be most
effective if they can
A. influence the costs and benefits of employee actions.
B. improve employee satisfaction with the job.
C. communicate goals and objectives effectively to their employees.
D. fire inefficient employees.
