Diversifying to reduce volatility is a good idea only if
A. shareholders can diversify within their own investment portfolios at low cost.
B. firms are willing to invest in capital formation.
C. firms account for social costs of production.
D. shareholders are willing to pay premium for a company in order to reduce return
volatility.
In a very basic principal-agent model, output is contractible if:
A. output can be observed with some positive cost.
B. the employee produces many products.
C. the employee works in a team.
D. the employee produces a single output.
Which of these situations limit the use of ownership in resolving incentive problems?
A. The employees are well trained and highly qualified.
B. The employees try to maximize their personal utility.
C. The employees lack full control over their output.
D. The actions of employees are unobservable.
Which of the following regulatory procedures transfers wealth from the initial
landowners whose property is restricted to those landowners whose land has no
restrictions?
A. Tax on agricultural income
B. Import quota
C. Zoning restrictions
D. Price ceiling
An iron and steel manufacturing plant was facing a power crisis on a daily basis. The
unit had to stall production for about two hours on an average per day. In order to
minimize the loss, the owner decided to invest in a cogeneration unit that would
produce enough power to facilitate production during the peak load hours. This action
of the manufacturer exemplifies:
A. a monopoly-pricing strategy.
B. a forward or downstream integration.
C. a dual-pricing strategy.
D. a backward or upstream integration.
A firm that produces its own output is engaging in ______ integration, while a firm that
markets its own good is engaging in ______ integration.
A. vertical; horizontal
B. downstream; upstream
C. forward; backward
D. backward; forward
Economies of scale arise when
A. all inputs increase by the same amount.
B. one input increases and the others are held constant.
C. one input increases and the others decrease.
D. all inputs increase at the same rate.
The basic incentive problem is that owners and employees:
A. are both concerned about sales maximization.
B. have fundamentally different objectives.
C. need government assistance to solve differences.
D. generally operate in perfectly competitive markets.
Ethics codes in corporate life tend to emphasize (a) compliance with laws and
regulations, (b) honesty and integrity, and (c) avoidance of conflicts of interests. Which
one is the most important in today’s world? How does economics help in understanding
its importance?
In order to survive in a market, a firm needs to
A. make extensive use of available technology.
B. hire more capital and less labor.
C. produce a product demanded by consumers at the lowest possible price while
covering costs.
D. charge higher prices for its products than its rivals and revise prices upward
periodically.
If the technology, the nature of competition, or the regulatory environment change in an
industry, then
A. the appropriate organizational architecture will change too.
B. a good organizational architecture will shut down.
C. the organizational architecture will be able to restore the former market environment.
D. the industry will increase production.
The difference between what a consumer is willing to pay for a product and what she
actually pays when buying it is known as
A. consumer surplus.
B. the exchange rate.
C. the inflation rate.
D. price discrimination.
Refer to Figure 17.1. What is the output level where the average cost is at its minimum?
A. 6 units
B. 7 units
C. 8 units
D. 9 units
The income effect means that when the price of a good rises
A. the buying power of your income falls.
B. consumers have an incentive to consume less of the good with a relatively higher
price and more of the good with a relatively lower price.
C. your preferences also change.
D. you buy more normal goods and fewer inferior goods.
Self-selection:
A. increases the number of qualified applicants for a job.
B. increases the turnover costs of a firm.
C. increases the compensating wage differential.
D. reduces the compensating wage differential.
According to Ronald Coase, allocation of resources in a free-market economy will be
efficient as long as
A. property rights are clearly assigned but not enforced.
B. contracting costs are sufficiently high.
C. property rights are clearly assigned and can be enforced with low contracting costs.
D. property rights are assigned only to the rich.
Assume the government introduces a $0.50 per gallon tax on gasoline. Which of the
following is true?
A. The quantity of subway and bus tickets sold is likely to increase.
B. The quantity of cars sold is likely to increase.
C. The quantity of gasoline sold is likely to increase.
D. The quantity of cars manufactured by producers will increase.
By creating smaller, flatter organizations, reengineering:
A. reduces outsourcing opportunities.
B. reduces replacement opportunities.
C. increases advancement opportunities.
D. reduces advancement opportunities.
The Occupational Safety and Health Administration (OSHA) attempts to stop safety
violations in business through inspections and fines. Though workers are supposed to
earn a premium wage for working in more risky environment, the OSHA inspections
may be a good idea because
A. employees might not have good information about the level of danger.
B. employees may already understand the risks that they are exposed to on the job.
C. inspections and fines may raise the cost of production significantly.
D. there are never any societal costs or externalities to dangerous working conditions.
If a strategic move is credible, it is likely to
A. be the dominant strategy of all the players in the game.
B. change the actions of rivals.
C. result in repeated, sequential interactions.
D. result in self-enforcing outcomes.
Refer to Figure 7.2. If Happy Times Theater charges one price to day customers and
another price to night customers, then its total profit on the sale of tickets will
A. increase.
B. stay the same.
C. decrease.
D. vary according to the slope of marginal revenue curve.
If each division of a company with a monopoly niche is allowed to set its transfer price
at the profit-maximizing level for the next division as the product flows toward the
consumer (assuming no external market for the product), then prices will:
A. be higher and profits lower than with non-divisional organization.
B. be lower and profits higher than with a non-divisional organization.
C. be the same and profits will be the same as with a non-divisional organization.
D. match the competitive benchmark and profits will be zero.
Large multinational corporations are usually set up as:
A. U form of business organizations.
B. M form of business organizations.
C. network organizations.
D. mixed designs.
The basic incentive problem associated with internal transfers is that:
A. divisional managers have private information about opportunity costs.
B. divisional managers have only public information about opportunity costs.
C. senior management have private information about opportunity costs.
D. senior management make all information about opportunity costs public.
A production function of the form Q = 40 L.75 K.20 exhibits ______ in the long run.
A. increasing returns to scale
B. decreasing returns to scale
C. constant returns to scale
D. diminishing returns to the variable input
Sidney Featherstone of TIP Inc. is the owner and CEO of the company. He has made the
company successful through his decision making over the years. This year he decided to
retire and move to Costa Rica. He does not intend to change any aspects of decision
making, rewards, or performance evaluation in TIP Inc. What is likely to happen to
TIP? Why?
Leadership is the process of persuasion or example by which an individual induces a
group to pursue objectives held by the leader or his or her followers. This definition of
leadership emphasizes ______ as an important characteristic of leadership.
A. motivation skills
B. lobbying
C. vision setting
D. planning skills
The opportunity cost of any business decision is
A. accounting cost divided by the level of output.
B. the cost per unit of output.
C. the cost of the next best alternative.
D. the cost of doing business in the future.
In the principal-agent model, at the employee’s optimal effort choice:
A. the net benefits of effort are maximized.
B. the marginal costs of efforts exceed the marginal revenue.
C. the incentive coefficient of effort is very high.
D. the marginal benefit of effort is negative.
Assume the market for hammers is perfectly competitive and the current price is $15.
If, at this price, the quantity of hammers demanded is 15,000, while the quantity
supplied is 25,000, then
A. the market for hammers is in equilibrium.
B. the price of hammers is likely to increase.
C. the price of hammers is likely to decrease.
D. there would be no change in price.
Full-cost transfer-pricing creates an incentive for:
A. distribution to be inefficient.
B. distribution to be over-efficient.
C. manufacturing to be over-efficient.
D. manufacturing to be less efficient.
There is scientific evidence to suggest that:
A. agents respond to incentives.
B. agents do not respond to incentives.
C. agents respond to piece rates but not bonus plans.
D. agents respond to incentives only if they can cheat.
The ______ directs the organization’s goals, objectives, and budgets. He/she oversees
the investment of funds and manages associated risks, supervises cash management
activities, executes capital-raising strategies to support a firm’s expansion, and deals
with mergers and acquisitions.
A. chief accounting officer
B. chief executive officer
C. chief financial officer
D. chief operating officer
What are the recent trends in organization design?
What is the difference between a repeated and a nonrepeated game, and in which form
is reputation an important consideration?
It is commonly believed that the best ways to motivate an employee are (1) to improve
the quality of the workplace and (2) to make the employee feel like he/she is part of the
company. How would an economist analyze these statements?
Corporate power comes from the people who voluntarily agree to comply with a
leader’s proposal. Formal authority and control over a company’s budgets and resources
are some sources of corporate power. Corporate power also comes from the people who
voluntarily agree to comply with a leader’s proposal. Which one is most important for
the successful functioning of today’s corporate management?
The CEO of Always Round Tires has decided to open a battery division. He thinks that
batteries would sell well with tires at their outlets and that Always Round’s quality
reputation will be transferred to the batteries. Should he set up the new division as a
Revenue Center, as a Profit Center, or as an Investment Center? Why?
Always Round Tire finds that their demand curve is P = 50 − .02 Q. What price and
quantity combination will maximize the firm’s revenue? What are the total revenue and
price elasticity at this point?
Draw a graph showing the trade-off between salary and benefits. Show an employee’s
indifference and a firm’s isocost curve. Label the equilibrium salary/benefits
combination. Discuss what would happen as individual taxes fall or as firm payroll
taxes rise.
What was the main reason for “liar loans” to proliferate?
The text expends considerable effort detailing the reengineering of a hospital. At the
end of the case study, the text notes that the changes in process and structure inside the
hospital were complementary. In the context of organizational architecture, what does
this mean?
Currently,
, where MPs and MPa are the marginal products of steel and aluminum for a company
whose production function is Q = s0.5 a0.5. Ps = Pa = $1 are the prices of steel and
aluminum, respectively, and the company has a total budget of $2 to spend on these
inputs. If the market price of the output is $3 per unit, then how many units of s and a
should the firm hire? What will be its output, revenue, costs, and profits?
What are some mechanisms for encouraging ethical behavior?
What are internal labor markets and what is an important characteristic of these
markets?
Provide some examples of management innovations that have lost their popularity.
Beside barriers to entry, what are some of the other reasons for incumbents to maintain
their profits?
Faith and Hope are 30-year-old identical twins. The only difference between them is
their credit score. Faith has a proven record of repaying debts. Faith can borrow money
at 4.5 percent. Hope has often missed debt payments. Hope can borrow at 8.5 percent.
They are considering enrolling in an evening MBA program. They plan on completing
the program in two years. Assume the annual tuition is $16,000 for both years. They
also anticipate that the nonmonetary costs of obtaining an MBA will be $40,000 per
year. The twins anticipate that after graduation in two years, their earnings will be
$10,000 per year higher until they retire at age 62. Should Faith enroll in the evening
MBA program? Should Hope enroll in the evening MBA program?
Many products come with a warning about how to use the product without harming
other people. Why?
What are the common transfer pricing methods?
Decentralized decision making is very controversial in a corporate environment. Central
office managers feel like they are losing control of managers in specific plants or
regional offices. What are some of the issues that must be reviewed before making the
final decision on where to place final decision-making power?
