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ABC Corp. has a bonus plan in place for its CEO, linking her pay to annual earnings.
ABC will pay her $180,000 if earnings are high, $90,000 if they are normal, and $0 if
they are low. Each event is estimated to have equal probability. Assume the CEO is
indifferent between this bonus plan and receiving $75,000 with certainty. Which of the
following is true?
A. The CEO's expected bonus is $90,000.
B. The CEO is not willing to give up $15,000 in expected bonuses in order to avoid the
risky scheme.
C. $85,000 is the CEO's certainty equivalent for the current bonus plan.
D. The CEO has no clue about risk management.
Assume the market for ceiling fans is perfectly competitive and is currently in
equilibrium. If the demand increases while the supply decreases, then we can be certain
that
A. the equilibrium price will increase.
B. the equilibrium quantity will increase.
C. both price and quantity will increase.
D. both price and quantity will decrease.
Which of these will hold true for an unregulated, competitive industry?
A. The market price will be higher than the marginal cost of production.
B. The marginal cost will be higher than the average cost of production.
C. The marginal cost of production will be equal to the market price.
D. The market price will be lower than the marginal cost of production.
W. Edwards Deming, the quality expert, has hinted that incentive pay is actually
counterproductive. Economic analysis indicates that enhancing corporate culture and
incentive rewards plans are:
A. substitutes for each other.
B. complements for each other.
C. the sources of all inefficiencies in modern businesses.
D. convex functions of the technology principle.
If consumers find that there are substantial transaction costs to purchasing a product,
then
A. overall consumer demand is greater at each price.
B. overall consumer demand is the same at each price.
C. overall consumer demand is less at each price.
D. equilibrium price and quantity both fall.
Empowerment may be a problem because:
A. managers are never eager to empower anyone else except themselves.
B. managers are usually ambiguous when it comes to empowerment.
C. workers are always eager to empower themselves even if they are unqualified.
D. managers are usually very eager to empower those who are least qualified.
Refer to Figure 6.1. The area RSTU represents
A. economic surplus.
B. the profit earned by the monopolist.
C. the loss incurred by the monopolist.
D. deadweight loss.
Centralized decision making is most commonly found in:
A. firms that are expanding into other geographical areas.
B. stable industrial environments.
C. emerging economies and industries.
D. highly vertically-integrated firms.
As output expands from 199 to 200 units, total costs rise from $2,985 to $3,000. At this
stage, the marginal cost and average cost of production are
A. $1 and $200.
B. $15 and $15.
C. $29.85 and $15.00
D. $1.
Let EdGI refer to the income elasticity for gasoline. Suppose EdGI= 2; then this means
that if income
A. increases by 2 percent, QdG will increase by 1 percent.
B. decreases by 1 percent, QdG will decrease by 2 percent.
C. increases by $1, QdG will decrease by 2 percent.
D. decreases by 2 percent, QdG will decrease by 1 percent.
Which of the following is a major by-product of the technological change that took
place in the 1980s?
A. Rapid product obsolescence
B. Reorganization of inventory control methods
C. Well-defined property rights
D. An increase in outsourcing
A necessary condition for market power to exist for a particular company in a market is
that
A. information must be understood by both buyers and sellers.
B. effective barriers to entry must exist.
C. the number of firms should be over 150.
D. consumers perceive all products as homogeneous.
A working knowledge of both markets and firms is important for managers to be
effective because it
A. helps them make appropriate strategic and operational decisions.
B. helps them to exploit other executives.
C. helps them train their subordinates better.
D. helps them earn high bonuses.
A manager in an investment center is offered a potential investment that would have an
ROA of 15 percent. After the investment, it would make up 20 percent of his total
portfolio. Currently, he makes 20 percent on his portfolio, though the company requires
only 12 percent. Which of the following is true?
A. He will make the investment since it is 3 percent greater than the company's required
return.
B. He will make the investment because a larger portfolio is always better than a
smaller portfolio.
C. He will not make the investment because the company prefers 12 percent.
D. He will not make the investment because it lowers his overall return to 19 percent.
In most models of managerial conflict, the owner is the ______ and the manager is the
______.
A. wage earner; stockholder
B. employee; director
C. principal; agent
D. resource; resource owner
Assume SeatComfy Inc. estimates the demand for its table chairs to be Q = 5,000 - 25P
+ 4I +10PA - 15 PT, where P = the price of SeatComfy's chairs; PA = average price of
competitors' chairs; PT = price of tables; and I = average income of SeatComfy's
customers. Which of the following is true?
A. SeatComfy's chairs are inferior goods; SeatComfy's chairs and tables are
complements, while SeatComfy's and competitors' chairs are substitutes. SeatComfy's
sales decrease by 250 units for each $10 increase in their own price.
B. SeatComfy's chairs are normal goods; SeatComfy's and competitors' chairs are
substitutes, while SeatComfy's sales are not affected by the pricing decisions of table
producers. SeatComfy's sales increase by 50 percent if the price decreases by $2.
C. SeatComfy's chairs are normal goods; SeatComfy's chairs and tables are
complements, while SeatComfy's and competitors' chairs are substitutes. SeatComfy's
sales decrease by 25 units as price increases by $1.
D. SeatComfy's chairs are normal goods; SeatComfy's chairs and tables are
complements, while SeatComfy's and competitors' chairs are substitutes. SeatComfy's
sales decrease by 250 units as price increases by $1.
The long-run price elasticity of demand for a product is generally ______ the short-run
elasticity for the same product.
A. lower than
B. equal to
C. higher than
D. not comparable to
When asset specificity is very high and there is a lot of market uncertainty, then it is
best for a firm to:
A. buy in the open market.
B. use a long-term contract.
C. vertically integrate.
D. engage in a joint venture.
______ can provide incentives to honor implicit contracts.
A. Value maximization
B. Adverse selection
C. Reputational concerns
D. Bargaining power
Autocorp faces the following demand function for its automobiles:
P = 55,000 – 200 Q
Its MC is $9,000. What will be its price if: (a) it decides to sell the automobiles by itself
and (b) it sells though SUVmart, an independent distributor. What is the consequence of
this exclusive dealing on prices?
In the model Q = αe + , management cannot readily observe:
A. Q and e.
B. Q and α.
C. Q and .
D. e and .
A cost center can be asked to achieve one of two typical objectives. A cost center can
either minimize costs for a given output or it can:
A. maximize revenue for a given price.
B. maximize output for a given budget.
C. maximize returns for a given budget.
D. minimize output for a given budget.
Refer to Figure 9.5.
The likely outcome for a simultaneous nonrepeated bid is
A. GMB—High, VolgaBus—High.
B. GMB—Low, VolgaBus—High.
C. GMB—High, VolgaBus—Low.
D. GMB—Low, VolgaBus—Low.
In some industries, pollution rights are sold from one company that does not need them
to another that does. In recent years, conservation groups have purchased pollution
rights so they cannot be exercised. Companies in need of pollution rights will find that:
A. the supply of pollution rights has increased.
B. the prices of pollution rights have fallen.
C. the relative costs of pollution control equipment has gone up.
D. the prices of pollution rights have gone up.
The accounting-based performance analysis:
A. provides aggregate level data that is insufficient for decision making.
B. is completely under the control of the operating managers.
C. is a true reflector of a particular management center’s functioning.
D. provides inexpensive information on opportunity costs.
According to the text, successful firms tend to set up
A. an organizational architecture that is complex and decisions are "top-down."
B. an organizational architecture that is least expensive and decisions are "top-down."
C. an organizational architecture that links decision making with decision rights.
D. an organizational architecture that keeps decision rights reserved for the senior
management.
Cost center managers are evaluated on their efficiency in using an input-mix to:
A. produce a stipulated level of output.
B. generate a stipulated amount of revenue.
C. produce a pre-decided level of net profit.
D. generate a certain amount of return on investment.
In the single-period principal-agent model:
A. both the employer and the employee are risk-averse.
B. both the employer and the employee are risk-neutral.
C. the employer is risk-averse but the employee is risk-neutral.
D. the employer is risk-neutral but the employee is risk-averse.
While very few markets are “purely competitive” according to the strict economics
definition, market analysts often use competition as
A. the benchmark from which to judge other market settings.
B. the standard of an inefficient market structure.
C. an example of a market with poor entry and exit conditions.
D. an example of a market with asymmetric information.
The Project on Corporate Responsibility launched by Ralph Nader in 1969 seeks to:
A. lower the company's legal expenses.
B. devote substantial resources to stakeholders instead of employees, customers,
suppliers, and local communities.
C. make corporate management responsible for upholding a broader spectrum of
democratic values.
D. reduce the company's wage bill.
The absolute value of the marginal rate of substitution is a measure of
A. the slope of a budget constraint.
B. the slope of an indifference curve.
C. the relative price of two goods.
D. income effect of a price change.
With the creation of value, there is a
A. leftward shift of both the demand and supply curves.
B. leftward shift of the supply curve.
C. rightward shift of the demand curve.
D. leftward shift of the demand curve and a rightward shift of the supply curve.
Changes in an organizational architecture must be:
A. coordinated and done randomly, starting with the solvable problems.
B. coordinated and done sequentially, starting with the minor problems.
C. coordinated and done all at once.
D. coordinated and done sequentially, starting with the major problems.
Under what market structure do we have only one firm?
A. Perfect Competition
B. Monopoly
C. Monopolistic Competition
D. Oligopoly
If a corporation compares its compensation and performance-evaluation systems to its
competitors, it has engaged in:
A. plagiarism.
B. patent infringement.
C. benchmarking.
D. specific knowledge enhancement.
