In a very basic principal-agent model, output is contractible if:
A. it can be observed with some positive cost.
B. the employee produces many products.
C. the employee works in a team.
D. the employee works independently and cannot game the performance measure.
Calculate the markup price if MC = $10.00 and price elasticity equals 1.7.
A. $5.88
B. $17.24
C. $24.27
D. $32.42
Consumer Reports and other organizations rank companies on the quality of their
products and the reliability of their services. These companies provide an:
A. incentive for corporate cheating.
B. internal audit function for corporate honesty.
C. insight into the organization’s mission and vision.
D. external check for corporate honesty.
If the generic production function Q = f (K, L) displays increasing returns to scale, the
value of K is fixed in the short run, and the prices of all inputs are held constant, then
A. the short-run average cost curve must be strictly decreasing.
B. the long-run average cost curve must be strictly decreasing.
C. the short-run and the long-run average cost curves will coincide.
D. the long-run average cost curve must be strictly increasing.
Independence Burgers serves fast food at its 300 franchised outlets across the South.
The chain has recently found that (a) people are upgrading to restaurants when they eat
out, (b) government regulation of beef has been tightened, and (c) modern food
preparation technology makes central commissaries more cost effective. What should
Independence Burgers do about its organizational architecture?
Consider the salary of Mary Sue Nelson, a sales agent for Plain Truth Advertising. Her
wage package is , where Q is her dollar volume of sales. Her
productivity is , where e denotes her hours of effort and is a random
variable with mean 0. She has an effort cost of C = e2. Under this contract, the expected
value of her total wages will be:
A. $200.00.
B. $1,000.00.
C. $3,060.00.
D. $4,200.00.
In addition to other factors, the increased use of technology and the reduced costs of
information transfer from local office to corporate headquarters has:
A. significantly increased the need for centralized decision making.
B. only increased the costs of decentralization.
C. reduced the need for middle managers and increased the scope of local
decision-making authority.
D. shown that technology has little impact on the centralization issue.
Dan Unowsky manages a production group in a PC repair shop. He has noticed that the
speed of repair is based on each worker doing one task. However, if an employee is out
sick, then the entire repair process slows down. This is an example of:
A. coordination costs.
B. the trade-off between low cross-training costs and reduced flexibility of the
employees.
C. the absolute need for every employee to be trained in all aspects of PC repair.
D. managerial ineptitude.
Slogans, company parties, rituals, and role models are all aspects of:
A. benchmarking.
B. rational expectations.
C. empowerment.
D. enhancing communication.
If the market demand and the market price for a product increase, then the reaction of
companies that manufacture this product
A. will be identical.
B. will be dependent on the prevailing tax system.
C. will depend on whether or not the organization is attuned to market incentives.
D. will be dependent on the government regulatory mission.
Ultimately, power to change within an organization comes from:
A. other people who voluntarily agree to comply with a leader’s proposals.
B. employees who perform well only when a crisis occurs.
C. union leaders who directly participate in the decision-making process.
D. changing the organizational architecture every two years.
In a small numbers environment, ______ is a useful managerial tool for considering
rivals’ or competitors’ responses to decision making.
A. game theory
B. competitive market theory
C. risk sharing theory
D. intrafirm strategy
If a company wants an employee to average about $14.00 per hour to produce 60 units
per hour, in addition to a base salary of $7.00 per hour, what should be the incentive
rate per hour?
A. $0.117
B. $8.54
C. $0.333
D. $1.25
A major advantage of long-term contracts over short-term contracts is that they increase
the incentives of the contracting parties to:
A. practice holdup actions.
B. practice arbitrage.
C. undertake spot market transactions.
D. make firm-specific investment.
You want to hire a law firm to represent you from which you derive benefit. The law
firm incurs costs from providing this service. As long as marginal benefits are greater
than marginal costs, value is:
A. minimized.
B. not maximized because more hours of services are provided.
C. not maximized because fewer hours of services are provided.
D. maximized.
Efficiency wages can be used to:
A. prevent self-selection of employees.
B. retain firm-specific human capital.
C. compare the relative performance of employees.
D. reduce influencing activities.
A waiter in an all-night restaurant at a dangerous location is likely to receive:
A. a competitive market wage.
B. a wage that equals returns to general training.
C. a wage that equals returns to specific human capital.
D. a wage with a compensating wage differential.
Which of the following is an important element of corporate culture?
A. Dress code and political correctness in the work place
B. Proper coordination among employees
C. Effective communication
D. Corporate takeovers to decrease the wealth of shareholders
In the United States, the board of directors of corporations have a fiduciary
responsibility to:
A. set the prices of the products the corporation produces.
B. raise investment capital in their spare time.
C. operate the company on a day-to-day basis.
D. represent the interest of its shareholders.
Assume your company produces good X using only two inputs, capital (K) and labor
(L). Also, assume L is measured on the vertical axis and K on the horizontal one. If the
prices of inputs are PK = $30 and PL = 15, and your company is behaving efficiently,
what is the slope of the isoquant at the current input mix?
A. -2
B. -1/2
C. 2
D. 1/2
If a company adds up all the costs of producing an intermediate product – direct labor,
materials, and overhead – to establish a transfer price, then it is using a:
A. market-based transfer price.
B. marginal-cost transfer price.
C. full-cost transfer price.
D. monopoly transfer prices.
The demand for normal goods follows the law of demand because of
A. the substitution effect only.
B. the income effect only.
C. risk-aversion by consumers.
D. both the substitution and income effects.
A pilot for a private jet stops for refueling in Omaha, Nebraska. Topper Fuels offers him
a case of French wine to refuel with them (a total retail value of $324 to the pilot). For
refueling, inspections, and minor repairs, Topper charges $2,700, $400 more than the
least expensive fuel company. What has happened to the company that owns the private
jet?
Gaming refers to a situation where:
A. employers fix unachievable output and target levels.
B. employees consistently understate the target levels in order to meet them.
C. employees increase output to gain commissions beyond the firm’s capacity.
D. employees inappropriately increase output to gain commissions.
To help with motivation, long-term productivity, and retention, firms with internal labor
markets tend to offer all of the following except
A. efficiency wages.
B. benchmark competitive wages.
C. pay based on job seniority.
D. internally based promotion systems.
A cost of reengineering programs is that they change:
A. performance-evaluation systems but not decision rights.
B. decision rights but not performance-evaluation systems.
C. the external market forces as well as the organizational architecture.
D. the measures used to evaluate high-level executives.
Refer to Figure 17.1. Which of these will hold true if the manager is given a budget of
$155?
A. She should produce 6 units of output because profits are maximized.
B. She should produce 8 units of output to maximize output for the budget.
C. She should try to produce 9 units of output because average costs are minimized.
D. She should lobby her boss for more money.
The ______ model suggests that that the productivity of employees in a firm will
increase if the firm offers lifetime employment and a high salary.
A. only-money-matters
B. happy-is-productive
C. product-of-the-environment
D. good-citizen
Which of the following is a distinction between general and specific human capital?
A. General human capital consists of training and education that is valued by different
firms, whereas specific human capital is more valuable to the current employer.
B. General human capital enables workers to earn compensating wage differentials,
whereas workers with specific human capital earn the competitive wage rate.
C. General human capital leads to higher labor costs, whereas specific human capital
leads to higher turnover costs.
D. General human capital leads to self-selection on the basis of risk preference, whereas
specific human capital leads to the adverse selection problem.
The demand and supply curves in the market for gasoline are illustrated in the graph
below.
Starting at the equilibrium point, if the government imposes a price ceiling of $10, the
deadweight loss will be the area ______.
A. D + E
B. F + G
C. D
D. E
Disney sold The Little Mermaid for $20 with a $5 mail in rebate. The rebate should
have
A. reduced overall customer demand.
B. stabilized overall customer demand.
C. increased overall customer demand.
D. inverted overall customer demand.
How do we solve the incentive problem and design optimal architecture?
The Sarbanes-Oxley Act of 2002 attempts to reduce corporate fraud among top-level
executives. Comment on the strengths and weaknesses of this act.
Why are firm-specific assets so important in the decision to build internally, negotiate a
long-term contract, or buy on the open market?
The dean of a large university issues the following policy for faculty pay-raises in the
smaller satellite campuses: faculty pay increases will be possible only if enrollment
increases above last year’s targets. Evaluate the impact of this policy on the overall
system.
What changes in the marketplace and in technology have spurred the movement toward
TQM-like architecture changes in modern corporations?
What does the tangency between an indifference curve and the budget line determine?
Johnson & Johnson, a personal care products company, has a four-tiered credo or
mission. In order, it states its relationship to customers, employees, communities, and
finally stockholders. This credo seems to have improved the ethical standards of this
corporation. Why doesn’t it conflict with wealth creation?
Clearly, an economist would like to see a profit center implement a system that most
closely approximates the rule of profit maximization, MR = MC, in building a system
of prices for other divisions. What are the pluses and minuses of allowing a division to
engage in this type of activity?
Give examples of how government intervention helps reduce moral hazard and adverse
selection problems in internal labor markets.
Why do economies of scale and learning curve effects look similar when they are
graphed? What different concepts do they represent?
Corporate social responsibility may require changing the mission of the company to a
‘constrained’ wealth maximization. Is it possible for a few firms in the marketplace to
shift their objective functions in this way? Why?
Make a case for 360-degree performance evaluation based on the informativeness
principle. What problems may be encountered from implementation of such a system?
Always Round Tire’s new division, Start-up Batteries, finds that its total cost curve, TC
= 300 + 2Q + 2Q2 and its demand curve, P = 130 – 2Q.
If the division is operated as an independent profit center, what will be the price and
quantity sold each day? Will the division make a profit?
If the division is operated purely as a revenue center, how many batteries will they sell
each day?
If the division is operated as a cost center and told to produce 20 batteries per day, what
would be the cost per battery?
What is transfer pricing?
Explain why the top executives of Socit Gnrale are more likely to be blamed than Jrme
Kerviel.
Two consumers, 1 and 2, of the same product have the following demand curves:
Q1 = 500 – 10P and Q2 = 500 – 20P. MC for the firm is $10. Calculate the prices when
the firm discriminates between the two consumers. Is this a good strategy, or should the
firm charge the same price to both of them?
Great Nuggets finds that there is a clear gender difference in the demand for their
chocolates. Men have very little price sensitivity and tend to buy whatever the sales
clerk recommends. Women, on the other hand, tend to ask many questions about
product quality and attempt to maximize the quantity available for the price. Great
Nuggets would like to implement a two-tier pricing system based on gender. What
(nonlegal) problems would it encounter?
Always Round Tire has a production function of Q = 300 L.75 K.5. If Always Round
Tire doubles the size of its production facility—increasing L from 250 to 500 and K
from 25 to 50 —what happens to the cost of production, even though we do not know
the wages of labor or the price of capital?
What are externalities and why is Ronald Coase an important figure in economics?