Managerial Econ - Chapter 6

"Suppose compensation is given by W = 512,000 + 217P + 10.08S, where W = total compensation of the CEO, P = company profits (in millions) = $200, and S = Sales (in millions) = $400. How much will this CEO be compensated?"

"$559,432.00 "

Which of the following is not a type of specialized investment?

"All of the statements associated with this questions are types of specialized investments. (Site specificity, Physical-asset specificity, Human capital)"

"If a firm manager has a base salary of $100,000 and also receive 5% of all profits, what percentage of his/her final income will be from the profit sharing plan given profit equals $1,500,000?"

43%.

A negative side of long-term contracts is:

A loss of flexibility.

Spot markets are an inefficient way for the firm to purchase inputs if

Both a and b. ( opportunism is a problem. - suppliers engage in hold-up.)

The most commonly used negative incentive used by firms is:

Dismissal.

Which of the following is not a solution to the manager-worker principal agent problem

Fixed hourly wages

Which of the following payment plans does not give an incentive to a manager to stop shirking?

Flat salary regardless of firm profits.

Which of the following mergers is an example of vertical integration

IBM purchasing a California computer chip company

A negative side of a revenue sharing plan is that it:

It gives no incentive for workers to minimize costs.

"When a manager enters the work-place from time to time to monitor workers, he is using:"

Spot checks.

The principal-agent problem refers to the fact that the agent's goals

do not always coincide with those of the principal

The disadvantage of vertical integration is that

firms no longer specialize in what they do best.

Which of the following forms of payment is not an incentive plan?

flat salary for a plant manager.

The problem with spot exchange in the presence of specific assets is that both parties

have incentives to behave opportunistically

Hold-up

is a hazard associated with relationship-specific exchange.

A long-term contract

is when a firm is legally bound to purchase inputs from a particular supplier.

A firm might choose to produce its own inputs if

long term contracts are costly to write

Which of the following is the primary disadvantage of producing inputs within a firm

loss of specialization

Relationship specific exchange

occurs because of specialized investments.

Vertical integration

occurs when a firm produces its own inputs.

The solutions to the principal-agent problem ensures that the firm is operating

on the production function.

A spot exchange involves a market where goods are bought and sold at

prevailing market price.

Which of the following is an outside incentive that forces managers to put forth maximal effort?

reputation.

Specialized investments

result in relationship-specific exchange.

A relationship specific exchange occurs when

socialized investments are important

Spot exchange typically involves

some transaction costs.

Long term contracts are not efficient if

specialized investments are unimportant

Which of the following is not a means of avoiding opportunism

spot exchange

Which of the following methods might be an efficient way of obtaining inputs when specialized investments are not important?

spot exchange.

Which of the following is not an inccentive scheme to ensure workers do a good job

straight hourly wages for dock workers

Often owners of firms who hire managers must install incentive or bonus plans to ensure

that the manager will work hard.

The principal-agent problem refers to the fact that

the agent's goals do not always coincide with those of the principal.

Long-term contracts are less likely when

the exchange environment is complex.

The disadvantage of vertical integration is that

the firm loses focus on what it does best

A drawback of separating ownership from control by creating a firm is

the principal agent problem

Which of the following is a not a transactions costs associated with using inputs?

the wages paid to labor.

In the absence of worker incentives

there is a natural tendency for workers to not give their maximum effort

One problem with revenue-based incentive schemes is they do not provide an incentive

to minimize costs.

"When relationship specific exchange occurs in complex contractual environments, the best way to purchase inputs is through"

vertical integration

One way of alleviating opportunism is

vertical integration.

Long term contracts become longer

when specialized investment becomes more important

A potential problem with piece rate plans is that

workers may stress quantity instead of quality

Which of the following is not an example of a piece rate compensation method?

Paying a carpenter to install a new back porch.

"To ensure quality, piece rate plans must usually be accompanied by:"

Quality control mechanisms.

"In order for spot checks to be effective, they must be:"

Random in nature.

Long-term contracts

can reduce opportunistic behavior

Transaction costs refer to

costs of exchange unrelated to production costs

Relationship-specific investments include

d) all of the above. (site specificity - dedicated assets - human capital.)

An increase in the marginal cost arising from a more complex specialized investment environment will cause the optimal contract length to

decrease