Managerial Econ Final!

Sowells thoughts on scarcity..?

resources are never adequate enough to fulfill all desired outcomes, scarcity is a problem

The demand for insurance arises primarily from people who are...

risk-averse

An insurance company suffers from adverse selection if...

safe customers are less likely to insure than risky customers

Your notebook computer's hard drive recently crashed, and you decide to take it to a local repair technician to have it fixed. In this relationship, who is the agent?

the technician is the agent

One of the basic functions of the budgeting process is...

transferring information

You are considering entry into a market in which there is currently only one producer (incumbent). If you enter, the incumbent can take one of two strategies, price low or price high. If he prices high, then you expect a $60K profit per year. If he prices low, then you expect a $20K loss per year. You should enter if

you believe the probability that the incumbent will price low is less than 0.75.

Keynes favored what kind of budgeting?

zero-based budgeting

Your software development company is considering investing in a new mobile app. If it goes viral (10% probability), you expect an NPV of $1,000,000; if it is moderately successful (20% probability), you expect an NPV of $200,000; and if it fails (70% probability), you expect an NPV of $-200,000. What is the expected NPV of the product?

$0

In a bad economy, a CEO has a 4% chance of meeting earnings estimates at regular effort, and a 5% chance at extraordinary effort. Extraordinary effort costs the CEO $10,000. How large a bonus should the CEO be paid for meeting estimates to encourage extraordinary effort?

$1 million

16. Suppose that every driver faces a 1% probability of an automobile accident every year. An accident will, on average, cost each driver $10,000. Suppose there are two types of individuals: those with $60,000 in the bank and those with $5,000 in the bank. Assume that individuals with $5,000 in the bank declare bankruptcy if they get in an accident. In bankruptcy, creditors receive only what individuals have in the bank. What is the actuarially fair price of insurance?

$100

A salesperson can put in regular effort (resulting in a 40% chance of sale) or high effort (60% chance of sale). If high effort costs the salesperson $20 more than regular effort, how large a per-sale bonus is required to encourage high effort?

$100

Your production line has recently been producing a serious defect. One of two possible processes, A and B, could be the culprit. From past experience you know that the probability that A is causing the problem is 0.8 but investigating A costs $100,000 while investigating B costs only $20,000. What are the expected error costs of shutting down process B first?

$16,000

Joe runs the Service Division for a car dealership. The overall dealership has profit of $10 million on sales of $100 million and costs of $90 million. Joe' s division contributed $9 million in sales and $7 million in costs. If the Service Division is evaluated as a profit center, what dollar amount is most relevant to Joe?

$2 million

An all-you-can-eat buffet attracts two types of customers. Regular customers value the buffet at $20 and eat $5 of food in costs to the restaurant. Hungry customers value the buffet at $40 and eat $10 of food. If there are 100 of each type in the market for a buffet dinner, what is the restaurant's maximum profit?

$3,000

Assume that malpractice claims against careful doctors cost $5,000 on average over the term of the policy and settling malpractice claims against reckless doctors costs $30,000. Doctors are risk-neutral and know whether they are reckless or careful, but the insurance company only knows that 10% of doctors are reckless. How much do insurance companies have to charge for malpractice insurance to break even?

$30,000

15. Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company could keep it in inventory for a possible future product and estimates that the reservation value is $250,000. Your dealings on the secondhand market lead you to believe that there is a 0.4 chance a random buyer will pay $300,000, a 0.25 chance the buyer will pay $350,000, a 0.1 chance the buyer will pay $400,000, and a 0.25 chance it will not sell. If you must commit to a posted price, what price maximizes profits? a. $400,000 b. $350,000 c. $300,000 d. $500,000

$300,000

A franchise restaurant chain is considering a new store in an unserved part of town. Its finance group estimates an NPV of $10 million if the population growth is 10% (40% probability), and NPV of $4 million of the population does not grow (30% probability), and an NPV of -$4 million if the population shrinks 5% (30% probability). What is the expected value of NPV (to the nearest dollar) for the following situation?

$4.0 million

You need to hire some new employees to staff your start-up venture. You know that potential employees are distributed throughout the population as follows, but you can't distinguish among them: Employee Value Probability $50,000 0.25 $60,000 0.25 $70,000 0.25 $80,000 0.25 What is the expected value of five employees you hire?

$50

17. What price are individuals with $5,000 in the bank willing to pay for the insurance? a. $50 b. $ 100 c. $1,000 d. No enough information 18. Will those with $5,000 in the bank voluntarily purchase insurance? a. Yes b. No

$50, no

You have two types of buyers for your product. Forty percent of buyers value your product at $10 and sixty percent value it at $6. What price maximizes your expected revenue?

$6

An employer faces two types of employees. Regular workers are 70% of the population and generate $100,000 in productivity. Exceptional workers are 30% of the population and generate $120,000 in productivity. Employees know their types and reject salaries below their productivity. If the employer offers a salary equal to the average productivity in the population, what will be the employer's per- employee profit?

-$6,000

If you were a manager of a cost center, which of the following areas would be of most interest to you? -Capturing potential economies of scale -Increasing the quality of your product. -Hiring more marketing staff to figure out how to increase prices. -Adding additional features to your product.

-Capturing potential economies of scale

Which of the following changes might help solve a divisional conflict regarding a decision? a. Change who has authority to make the decision b. Transfer information to the decision makers so they are better informed c. Change the performance evaluation and associated compensation of the decision makers d. All of the above

-Change who has authority to make the decision -Transfer information to the decision makers so they are better informed -Change the performance evaluation and associated compensation of the decision makers all the above!

Sowells thoughts on political decision making...?

-Generally reactive and focused on the short-term -Politicians, like all humans, are self-interested. -The goal is to choose the most popular solution that will re-elect them, not choosing the best long-term economic trade-off

A computer manufacturer has two divisions: one serving residential customers and one serving business customers. If an incentive conflict arises between the two divisions, how will overall company profits be affected? -Profits will definitely fall. -Profits will definitely rise. -Profits may fall, but it depends on the nature of the conflict. -The conflict has no potential to affect overall profit.

-Profits may fall, but it depends on the nature of the conflict.

You' re holding an auction to license a new technology that your company has developed. One of your assistants raises a concern that bidders' fear of the winner's curse may encourage them to shade their bids. How might you address this concern?

-Release analysts positive and negative scenarios -Use an oral auction

All the following provide a motive for vertical agreements EXCEPT -effective execution of price discrimination -elimination of free-riding among retailers -quality control -diversification

-diversification

Constrained vision

-human nature is unchanging and selfish -rules and institutions are needed in guiding social and political processes -Social processes serve to: limit the amount of pain we cause each other, and elevate our base nature

You are taking a multiple-choice test that awards you one point for a correct answer and penalizes you 0.25 points for an incorrect answer. If you have to make a random guess and there are five possible answers, what is the expected value of guessing?

0 points

Your company has a customer list that includes 3000 people. Your market research indicates that 90 of them responded to the coupon. If you send a coupon to one customer at random, what's the probability that he or she will use the coupon?

0.03

Suppose an investment project has an NPV of $75 million if it becomes successful and an NPV of -$25 million if it is a failure. What is the minimum probability of success above which you should make the investment?

0.25

13. To test the effectiveness of a two web advertising agencies, you increase your ad purchase with agency A by 50% without changing your purchase through agency B. The referrals to your website from agency A increased by only 34% but the referrals from agency B fell by 21%. What is the "difference-in-difference" estimate of referrals per dollar?

1.1

To test the effectiveness of a two Web advertising agencies, you increase your ad purchase with agency A by 50% without changing your purchase through agency B. The referrals to your website from agency A increased by only 34% but the referrals from agency B fell by 21%. What is the difference-in-difference estimate of the referrals per dollar through agency A?

1.1 referrals per dollar

What is an example of vertical integration?

A gourmet cheese company purchasing a dairy

Which of the following is an example of adverse selection? a. A safe driver taking greater risk in a rental car than his own car. b. A terminally ill person purchasing life insurance. c. An employment contract encourages little effort on the part of employees. d. All of the above

A terminally ill person purchasing life insurance.

When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction. The bids for the jobs consisted of promises of future profit streams that the managers would generate and then deliver to the state. In cases where the incumbent manager was the winning bidder, firm productivity tended to increase dramatically. When outside bidders won, there was little productivity improvement. If incumbent managers were not generally more qualified, how can you explain this result?

Adverse selection - winner's curse

Explain Adverse Selection

Adverse selection occurs when either the buyer or seller has more information about the product or service than the other. In other words, the buyer or seller knows that the products value is lower than its worth.

In which of the following cases might you expect to find a manufacturer granting exclusive territories? a. A pet supply chain that requires heavy local advertising to drive sales b. Custom computer sales that require a good deal of consultation c. A submarine sandwich chain that relies on its nationwide brand reputation d. All of the above

All of the above

If a seller is concerned about collusion among bidders, what change to the auction should the seller make?

Conceal the amount of winning bids.

A colleague tells you that he can get a business loan from the bank, but the rates seem very high for what your colleague considers a low risk loan. Select the adverse selection explanation for this, and offer advice to your friend on how to solve the problem.

Consider two types of borrowers, ones likely to pay back loans and ones less likely to pay back. If the bank cannot tell them apart, the bank can only attract bad borrowers. Your friend must signal that he is a good borrower

13. Reasons why might it be a bad idea to have corporate headquarters set transfer prices. A Corporate managers may not have good information about the best transfer price. B. It may lead division managers to provide misinformation about costs related to the transfer price. C. It distracts corporate managers from concentrating on larger problems. D. All of the above

D. All of the above

4. Why are contact lens manufacturers reluctant to sell their lenses through the Internet?

Doing so reduces the incentives of retailers to provide point-of-sale services

T or F Keynes was a trained economist?

False

You've just decided to add a new line to your manufacturing plant. Compute the expected loss/profit from the line addition if you estimate the following: • There's a 50% chance that profit will increase by $100,000. • There's a 30% chance that profit will remain the same. • There's a 20% chance that profit will decrease by $15,000.

Gain of $47,000

Unconstrained Vision

Human nature is malleable and perfectible! b. Belief in the perfectibility of man and power of reason, knowledge c. Discretionary planning and deliberate design in producing "common good"

Which type of organizational form has the benefit of closer coordination to serve a particular product or geographic area?

M-form organizations.

A colleague tells you that he can get a business loan from the bank, but the rates seem very high for what your colleague considers a low risk loan. Select a moral hazard explanation for this, and offer advice to your friend on how to solve the problem.

Once you have a loan, you are more likely to engage in risky behavior, and banks probably offer loans anticipating that you will engage in risky behavior. Your friend must show the bank that he is unlikely to engage in risky behavior.

When a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, representatives of other museums that have no chance of winning are actively wooed by the auctioneer to attend anyway. Why?

One of the maxims is that "strong losing bidders lead to higher winning bids"

The current managers are often the high bidders for the company. Why?

Outbidding existing managers is bad news: it indicates that they think the company is worth less than you do

What should the manufacturer set more accurately to stop losing money?

Set a more accurate residual value.

Alpha Industries is considering acquiring Foxtrot Flooring. Foxtrot is worth $20 million to its current owners under its existing operational methods. Because there are some opportunities for synergies between the two companies, Alpha believes that Foxtrot is worth $25 million as part of Alpha Industries. What do you predict for a sales price of Foxtrot?

Something between $20 and $25 million

Many police officer positions require the applicant to have a college degree even though the tasks of a police officer rarely call upon college course material. Why don't police departments increase their applicant pool by dropping this requirement?

The college degree may serve as a screening device.

14. Why might the difference-in-difference estimate of the referrals per dollar through agency A be biased?

The referral may be the result of the cumulative views a customer sees from both agencies, but the referral comes from the last ad seen.

Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose you're trying to sell a company a new accounting system that will reduce costs by 10%. Instead of naming a price, you offer to give them the product in exchange for 50% of their cost savings. Describe the information asymmetry, the adverse selection problem, and why soft selling is a successful signal.

The seller of the product knows whether the product works; the buyer does not. The buyer is worried that the seller has an incentive to lie—to tell him that the product will reduce costs regardless of whether they will. The buyer "signals" the quality of his product by offering to be paid only if it works. A seller who knew his product didn't work would not find it profitable to offer this kind of contract.

CUS Pharmacy wishes to carry Pepgro blue pills. But Daisy Pharmaceuticals, the maker of Pepgro, will not supply CUS unless CUS agrees to carry other medications that Daisy makes. This is an example of...

Tying

6. Why do vertical agreements typically pose less antitrust risk than horizontal agreements?

Vertical agreements often result in lower prices, which are beneficial to the consumer

7. Decentralization of decision-making authority is consistent with the development of what...?

c. Development of computing resources at the corporate, division, and employee level.

Moe Green estimates the cost of future projects for a large contracting firm. Mr. Green uses precisely the same techniques to estimate the costs of every potential job and formulates bids by adding a standard profit markup. For some companies to whom the firm offers its services, no competitors exist, so they are almost certain to get them as clients. For these jobs, Mr. Green finds that his cost estimates are right, on average. For jobs where competitors are also vying for the business, Mr. Green finds that they almost always end up costing more than he estimates. Why does this occur?

When no competition exists, the estimates that are a little high offset those that are a little low. When competition exists, the estimates likely to win the jobs that are underestimates (since it will likely be the lowest-cost bidder) and is less likely to win the jobs that he overestimates (since a rival bidder likely bids less).

If you can enter only one market, and the cost of entering the market (regardless of which market you select) is $250,000, should you enter one of these markets? If so, which one? If you enter, what is your expected profit? (select one) a. Yes you should, Singapore , $890,000 b. Yes you should, Malaysia, $540,000 c. yes you should, Philippines, $460,000 d. No you should not

Yes you should, Singapore , $890,000

12. In the final round of a TV game show, contestants have a chance to increase their current winnings of $1 million dollars to $2 million dollars. If they are wrong, their prize is decreased to $500,000. The contestant thinks his guess will be right 50% of the time. Should he play? What is the lowest probability of a correct guess that would make playing profitable? a. No , 33% b. Yes, 50% c. No, 50% d. Yes, 33%

Yes, 33%

21-2 Airline Departures 12. Planes frequently push back from the gate on time, but then wait 2 feet away from the gate until it is time to queue up for take-off. This increases fuel consumption and increases the time that passengers must sit in a cramped plane awaiting take-off. Why does this occur? (select all possible reasons) a. Consider the incentives of the pilots who decide whether to wait at the gate or 2 feet away from the gate. Pilot wages vary depending on whether the plane is parked at the gate or if the flight is "underway." b. Holding pay for a representative airplane captain is about $20 per hour while flight pay, which starts once the plane pushes back from the gate, is $184 per hour. c. This represents a principal (airline)-agent (pilot) conflict. Another reason is to game on-time departure stats if they depend on pushback rather than takeoff. d. You can't get in the head of pilots

a, b, c

Which of the following is NOT an example of moral hazard? a. People are more likely to lock their own car than a rental car. b. Skateboarders attempt more difficult maneuvers when wearing a helmet. c. Bad salespeople are less drawn to commission-based jobs. d. People with fire insurance are less likely to install smoke alarms.

c. Bad salespeople are less drawn to commission-based jobs.

11. When real estate agents sell their own, rather than clients', houses, they leave the houses on the market for a longer time (10 days longer on average) and wind up with better prices (2% higher on average). Which statements below are correct a. This is a classic principal-agent conflict. b. Real estate agents are compensated with a percentage of the purchase price, typically three percent. c. Waiting longer for a better offer will result in a higher price, but the bulk of this additional gain goes to the owner of the house (97%), while the costs of additional selling effort fall on the real estate agent. d. When the real estate agent sells his own house, he gets all of the extra profit from waiting, so he waits longer.

a, c, d

A reserve price is a minimum price set by the auctioneer. If no bidder is willing to pay the reserve price, the item is unsold at a profit of $0 for the auctioneer. If only one bidder values the item at or above the reserve price, that bidder pays the reserve price. An auctioneer faces two bidders, each with a value of either $30 or $80, with both values equally probable. What reserve price should the auctioneer set, and what is the expected revenue from auctioning the item with and without a reserve price? a. $80, $42.5, $60 b. $30, $ 30, $80 c. $30, $60, $80 d. $60, $60, $80

a. $80, $42.5, $60

12. If the paper mill were forced to transfer at marginal cost, how much money would the company make? a. 24.5 b. 34 c. 20 d. 14

a. 24.5

Which of the following is not an example of adverse selection? a. A business bets the proceeds of a bank loan on the next NFL game. b. An accident-prone driver buys auto insurance. c. A patient suffering from a terminal disease buys life insurance. d. A really hungry person decides to go to the all-you-can-eat buffet for dinner.

a. A business bets the proceeds of a bank loan on the next NFL game.

14. Stores that sell wedding dresses do not typically permit photos, and do not have tags in the dresses that would identify the manufacturer and style type. What is the purpose of these rules?

a. These retail stores want to prevent customers from "free riding" on their fitting and display services.

21. Why did BPO lose money? a. moral hazard b. adverse selection c. anticipation d. look ahead reason back

a. moral hazard

18. The HR department is trying to fill a vacant position for a job with a small talent pool. Valid applications arrive every week or so, and the applicants all seem to bring different levels of expertise. For each applicant, the HR manager gathers information by trying to verify various claims on resumes, but some doubt about fit always lingers when a decision to hire or not is to be made. -What are the Type I decision error costs? -What are type II decision error costs? -Which decision error is more likely to be discovered by the CEO? -How does this affect the HR manager's hiring decisions? a. you hire a bad worker; you fail to hire a good worker; you hire a bad worker; fail to hire a good worker b. you hire a good worker; you fail to hire a good worker; you hire a bad worker; fail to hire a good worker c. you can hire a bad worker; you hire a good worker; you hire a bad worker; fail to hire a good worker d. you can hire a bad worker; you can fail to hire a good worker; you hire a good worker; fail to hire a good worker Presentations

a. you hire a bad worker; you fail to hire a good worker; you hire a bad worker; fail to hire a good worker

6. In order to create an effective incentive compensation scheme, you must have adequate what...?

adequate performance measures

9. Loan applications require a lot of information from applicants to avoid

adverse selection

4. All of the costs associated with a principal interacting with an agent are called

agency costs

14. Your local fast-food chain with two dozen stores uses the company's internal corporate marketing department to produce signage, print ads, in-store displays, and so forth. When placing an order, store managers are assessed a chargeback (transfer price) that reduces store profitability but increases marketing department profitability. Lately, the store managers have been ordering more and more marketing services; the marketing department is swamped, and it cannot afford to hire more staff. What does this indicate about the chargeback rates? Select all that are true. a. "Customers" of the marketing department want to "buy" ever more services at the current transfer price. b. This indicates the transfer price is below the alternative, ordering these services from outside from an outside vender. c. This might be OK because the optimal transfer price equals the marginal cost, which could be below the market price if there is a margin in place. d. Yet, the additional transfers to the marketing department are not sufficient to cover the additional costs of fulfilling the orders. This indicates that the transfer price is set below the marginal cost in the marketing department. The transfer price is too low.

all of the above

15. Discuss the advantages and disadvantages of using divisional profit as the basis of incentive compensation for division managers compared to using company profit as the basis. Select all that are true. a. Divisional profit - focuses division managers on divisional performance (advantage) but perhaps at the expense of overall company performance (disadvantage) b. Company profit - focuses division managers on overall corporate performance (advantage) but exposes them to a lot of uncontrollable risk, for which they must be compensated (disadvantage); also may lead to some free-riding (disadvantage)

all the above

Which of the following is true about moral hazard? -Moral hazard arises from actions that cannot be observed. -Shirking is a form of moral hazard. -Moral hazard refers to the taking of excessive risk. -All of the above

all the above

14. Which of the following are characteristic of principal-agent conflicts that often exist in a firm? a. Managers do not always operate in the best interest of owners because owners are generally more risk averse than managers. b. Managers generally have a shorter time horizon than owners; thus, managers do not fully take into account the future long-run profitability of the firm. c. Managers do not always operate in the best interest of owners because managers care about the noncash benefits of their jobs. d. Firms can usually find solutions that reduce agency costs without increasing monitoring or incentive costs.

b & c

A 25% cost-0.25 20. The client agreed to pay the average cost computed in A for each form that BPO processed, but BPO lost money on the contract. How much did BPO lose, on average, for each form that it processed? a. $ .375 b. $.125 c. $. 25 d. $.50

b. $.125

If the bidders with the first- and third-highest values ($500 and $300) collude, which of these is closest to the winning price? a. $500 b. $400 c. $300 d. $200

b. $400

Suppose that five bidders with values of $500, $400, $300, $200, and $100 attend an oral auction. Which of these is closest to the winning price? a. $500 b. $400 c. $300 d. $200

b. $400

Consider the problem above, but now each bidder has a value of either $60 or $80. What reserve price should the auctioneer set, and what is the expected revenue from auctioning the item with and without a reserve price? a. $80, $80, $80 b. $60, $65, $60 c. $60, $80, $80 d. $80, $60, $60

b. $60, $65, $60

You are bidding in a second-price auction for a painting that you value at $800. You estimate that other bidders are most likely to value the painting at between $200 and $600. Which of these is likely to be your best bid? a. $1,000 b. $800 c. $600 d. $400

b. $800

17. When offered, most people say they would only pay less than $10 to play this game. What is a reason why people are willing to pay so much less than the expected value?

b. Individuals correctly deduce that the game will not actually pay off for high enough values

Which of the following provides an example of divisions based on a functional organizational structure? a. Americas, Africa, Asia, Europe b. Research and development, production, finance, marketing c. Youth products, teen products, senior products d. Business users, home users, educational users

b. Research and development, production, finance, marketing

2. A good incentive-compensation scheme anticipates what?

b. anticipates how an agent will game the scheme

In a first-price auction, you bid __________ your value, and in a second-price auction you bid _______ your value.

below; at

How should you bid in a common-value auction?

bid less aggressively the more competitors you face

A bidder's value for a good may be low ($2), medium ($5), or high ($7). There is an equal number of potential bidders having each value. Suppose two bidders participate in a second-price auction. What is the best estimate of the expected revenue from the auction? a. $4.11 b. $3.99 c. $3.56 d. $5.

c. $3.56

You own a retail establishment run by a store manager who receives a flat salary of $80,000. If you set up another store as a franchise with incentive compensation to the franchisee, what would be a reasonable total compensation range that the franchisee could earn?

c. $60,000- $100,000

If two of the three bidders collude, what is the price? (16 and 20) a. 16 b. 36 c. 17.5 d. not enough information

c. 17.5

You hold an auction among three bidders. You estimate that each bidder has a value of either $16 or $20 for the item, and you attach probabilities to each value of 50%. What is the expected price? If two of the three bidders collude? a. 16 b. 36 c. 18 d. not enough information

c. 18

Suppose that a paper mill "feeds" a downstream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume. For example, the first unit of boxes increases earnings by $10, the second $9, the third $8, and so on, until the tenth unit increases profit by just $1. The cost the upstream mill incurs for producing enough paper to make one unit of boxes is $3.50. 11. If the two companies are separate profit centers, and the upstream paper mill sets a single transfer price (the price the box company pays the paper mill), what price will it set, and how much money will the company make? a. 24.5 b. 34 c. 20 d. 14

c. 20

Which of the following is true about different ways of conducting a private-value auction? a. A first-price auction is strategically equivalent to a second-price auction. b. A first-price auction is strategically equivalent to an oral English auction. c. A second-price auction is strategically equivalent to an oral English auction d. None of the above

c. A second-price auction is strategically equivalent to an oral English auction

Which of the following is not an example of a process designed to combat moral hazard problems? a. Banks include restrictive covenants in loan agreements. b. Universities have students complete evaluations of professor performance at the end of a class. c. Insurance companies require applicants to provide medical history information as part of the application process. d. Employers regularly monitor employee performance.

c. Insurance companies require applicants to provide medical history information as part of the application process.

Which of the following is true? a. Moral hazard is primarily an issue prior to a transaction. b. Adverse selection is primarily an issue after a transaction. c. Moral hazard is the result of an information asymmetry

c. Moral hazard is the result of an information asymmetry

A multinational firm acquires many of its components pre-assembled from suppliers. One of these suppliers operates in a country with a much lower corporate income tax rate. How does this affect the vertical relationship between this supplier and the multinational?

c. The multinational should consider purchasing this supplier

Which of the following is true about the winner's curse? a. The winner's curse occurs primarily in private-value auctions. b. You successfully avoided the winner's curse if you made money in the auction. c. The winner's curse means that you bid incorrectly. d. The winner's curse means that you lost money in an auction.

c. The winner's curse means that you bid incorrectly.

Local Spanish TV markets cater to individual cities by producing local content. This content can be produced in-house by a network or they can also purchase rights to third-party produced content. Recently, Spanish cities have erected barriers to entry in television content production that allows content producers more market power. How would this have affected vertical integration between content providers and TV networks? a. There is more vertical integration to limit arbitrage by price discriminating content producers b. There is less vertical integration because point-of-sale services are less important c. There is more vertical integration to reduce the double marginalization problem d. There is less vertical integration because evading regulation is less important

c. There is more vertical integration to reduce the double marginalization problem

12. Discuss both moral hazard and adverse selection issues. Select the true statement. a. Your product fails about 2% of the time but this probability rate is probably not affected by user care. b. You can't face adverse selection in that those who tend to use the product inappropriately are less likely to purchase. c. You could face moral hazard in that, once users know they are insured, they will tend to use the product less carefully. d. In either case, the claim rate will not exceed 2% and you will make money.

c. You could face moral hazard in that, once users know they are insured, they will tend to use the product less carefully.

Transfer prices should be set at

c. the opportunity cost of the asset being transferred.

Unconstrained is....

collectivism

Which of the following is an example of moral hazard? a. High-quality products being driven out of a market by low-quality products. b. A local charity raising insufficient funds because no one contributes, expecting that their neighbors will. c. A bakery defaults on its loan because of a new consumer fear of carbohydrates d. A corporation uses a business loan secured for one investment on another, higher-risk investment

d. A corporation uses a business loan secured for one investment on another, higher-risk investment

Which of the following can be an example of a signal? a. An air-conditioning manufacturer offers a 50-year warranty. b. A lawyer offers to be paid only if the client wins. c. A student pursues an MBA. d. All of the above

d. All of the above

Which of the following is a potential solution to the adverse selection problem faced by insurance companies? a. Offer plans with different deductibles so that higher-risk customers accept higher deductibles/ b. Create a national database of customers that allows companies to look up each person's historical risk c. Mandate that every person purchase insurance. d. All of the above

d. All of the above

Which of the following is an example of moral hazard? a. Reckless drivers are the ones most likely to buy automobile insurance. b. Retail stores located in high-crime areas tend to buy theft insurance more often than stores located in low-crime areas. c. Drivers who have many accidents prefer to buy cars with air bags. d. Employees recently covered by the company health plan start going to the doctor every time they get a cold.

d. Employees recently covered by the company health plan start going to the doctor every time they get a cold.

In which of the following instances would an acquisition make the most sense? a. The target is a very profitable company b. Synergies exist between the acquirer and the target c. Integration costs are low between the two d. Synergy benefits outweigh the costs of integration

d. Synergy benefits outweigh the costs of integration

Which of the following actions is consistent with a manager whose compensation depends on meeting a budget goal and who does not believe he can make that goal? a. Asking a vendor to pre-ship and invoice materials for the following year. b. Discovering a "problem" in the order taking process, thereby forcibly pushing sales into the ensuing year. c. Increasing accounting reserve estimates, leading to higher recognized expenses. d. All of the above

d. all the above

A firm faces two kinds of employees, those able to sell 10 units/year, and those able to sell 5 units/year. High-productivity employees are willing to work for $100/year while low-productivity employees are willing to work for only $50/year. To screen out the low-productivity employees, the firm should a. offer a salary of $100. b. offer a salary of $75 plus $5/unit commission. c. offer sales commission of $10/unit. d. offer a sales commission of $20/unit, on sales above 5 units.

d. offer a sales commission of $20/unit, on sales above 5 units.

Which organizational forms requires the strongest management oversight to ensure coordination of functions?

functional organizations

Constrained is...

individualism

16. You are offered the following gamble based on coin flips. If the first heads occurs on the first flip, you get $2. If the first heads occurs on the second flip you get $4, and so on so that if the first head is on the Nth flip, you get $2N. The game continues until there is a heads. What is the expected value of this gamble? a. $ 2 b. $4 c. $10 d. infinite

infinite

Restrictive covenants on loans are used to avoid

moral hazard

3. Principal-agent relationships are subject to what kind of problems?

moral hazard problems

To combat the problem of adverse selection, ______ informed parties can employ _____ techniques.

more; signaling

You sell bicycle theft insurance. If bicycle owners do not know whether they are high- or low-risk consumers, is there an adverse selection problem?

no

Your product fails about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. 11. Would you want to price the extended warranty at 2% of the product price?

no

Principal-agent problems occur when what...?

occur when firm managers have more incentive to maximize profit than shareholders do.

According to Sowell decisions are best made through what kind of processes...?

systematic processes

Vertical Integration

the combination, under a single ownership, of two or more stages of production or distribution (or both) that are usually separate