Managerial Econ Exam

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? 1) $0.117 2) $8.54 3) $0.333 4) $1.25

1) $0.117

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? 1) -2 2) -1/2 3) 2 4) 1/2

1) -2

Which of the following is a distinction between general and specific human capital? 1) 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. 2) General human capital enables workers to earn compensating wage differentials, whereas workers with specific human capital earn the competitive wage rate. 3) General human capital leads to higher labor costs, whereas specific human capital leads to higher turnover costs. 4) General human capital leads to self-selection on the basis of risk preference, whereas specific human capital leads to the adverse selection problem.

1) 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.

Which of the following is not a benefit of decentralization of corporate decision making? 1) Incentive problems 2) More effective use of local knowledge 3) Conservation of the time of senior management 4) Training and motivation for local managers

1) Incentive problems

Identify the statement that best defines Nash equilibrium. 1) It is a set of strategies in which a firm does the best it can, given the action of its rival. 2) It is a sequence of actions, where the actions are taken at each node of the game. 3) It is a set of strategies that gives a player the first-mover advantage. 4) It is a sequence of actions that are taken to influence the actions of rivals.

1) It is a set of strategies in which a firm does the best it can, given the action of its rival.

Which of the following is true of a production function? 1) It specifies the maximum feasible output that can be produced for given amounts of inputs. 2) It specifies the maximum revenue that a firm can generate by selling its output. 3) It specifies the amount of goods that can be purchased in a market at a given price. 4) It specifies the expenses a firm can incur as a result of a production process.

1) It specifies the maximum feasible output that can be produced for given amounts of inputs.

Under which market structure is a firm's MR curve horizontal? 1) Perfect Competition 2) Monopoly 3) Monopolistic Competition 4) Oligopoly

1) Perfect Competition

Many college basketball programs require alumni to join a booster club before they can buy season tickets. This is an example of: 1) a two-part tariff. 2) first degree price discrimination. 3) block pricing. 4) cost-plus pricing

1) a two-part tariff.

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: 1) be higher and profits lower than with non-divisional organization. 2) be lower and profits higher than with a non-divisional organization. 3) be the same and profits will be the same as with a non-divisional organization. 4) match the competitive benchmark and profits will be zero.

1) be higher and profits lower than with non-divisional organization.

Kevin Freeman is the head of a team developing plastic knee replacements. Each member of the team brings specialized knowledge to the innovation process. Without both engineers and materials specialists, the project could not be successful. This is an example of the: 1) benefits of the use of dispersed specific knowledge. 2) costs of employee buy-in. 3) costs of collective-action problems. 4) free-rider problem.

1) benefits of the use of dispersed specific knowledge.

The difference between what a consumer is willing to pay for a product and what she actually pays when buying it is known as: 1) consumer surplus. 2) the exchange rate. 3) the inflation rate. 4) price discrimination.

1) consumer surplus.

The transactions costs of writing and enforcing contracts are higher in: 1) countries with poorly-enforced property rights. 2) countries with strongly-enforced property rights. 3) all counties with good court systems. 4) countries without political risks of property confiscation.

1) countries with poorly-enforced property rights.

The authors argue that successful corporations assign decision rights in ways that 1) effectively link decision-making authority with good information. 2) structure moneymaking tools for all employees. 3) completely eliminate the potential for fraud. 4) rely on monitoring and evaluation for all creativity.

1) effectively link decision-making authority with good information.

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 1) employees might not have good information about the level of danger. 2) employees may already understand the risks that they are exposed to on the job. 3) inspections and fines may raise the cost of production significantly. 4) there are never any societal costs or externalities to dangerous working conditions.

1) employees might not have good information about the level of danger.

The gains from specific training in human capital tend to go to the: 1) employing firm and not the individual. 2) federal government in the form of higher taxes. 3) individual and not the employing firm. 4) parents since they paid for the education in the first place.

1) employing firm and not the individual.

While production teams are important sources of productivity in business, they can suffer from the ______ problem. 1) free rider 2) reneging 3) externality 4) benchmark

1) free rider

The ______ represents the additional revenue that comes from using one more unit of input. 1) marginal revenue product 2) economic profit 3) learning curve 4) average revenue product

1) marginal revenue product

If there exists an external market for an intermediate good produced by a company, then an easy way to set a transfer price would be to use a: 1) market-based transfer price. 2) marginal-cost transfer price. 3) full-cost transfer price. 4) monopoly transfer price.

1) market-based transfer price.

If property rights are very hard to assign and transactions costs are particularly high, then, given the Coase Theorem, externalities: 1) may reduce the efficiency of resource allocation. 2) would leave resource efficiency unchanged. 3) allow resource allocations to remain efficient. 4) have not relationship to efficiency.

1) may reduce the efficiency of resource allocation.

Tasty Chicken has been buying its animal feed in the open market. It notices that about 10 percent of its purchases are watered down, so that the feed seems to weigh more than it actually does. To improve quality of its purchases, Tasty Chicken might consider: 1) moving to long-term contracts with specific feed producers. 2) hiring an economist to see if the market is really competitive. 3) lobbying for new laws concerning water levels in feed. 4) going out of the chicken processing business.

1) moving to long-term contracts with specific feed producers.

Negotiations and binding contracts are not possible between rivals in: 1) noncooperative games. 2) cooperative games. 3) perfect competition 4) single firm monopolies.

1) noncooperative games.

If a corporation operates two divisions that supply one another, and each division is located in a different country, then transfer prices are: 1) set to allocate profit to the low tax rate country. 2) set to allocate all costs to the low tax rate country. 3) set to allocate profit to the high tax rate country. 4) not allowed between most countries.

1) set to allocate profit to the low tax rate country.

One of the ways of overcoming the problem of adverse selection is through: 1) signaling. 2) bargaining. 3) free-riding. 4) costless contracting.

1) signaling.

The most famous story about organizing tasks into jobs comes from Adam Smith's tale of the pin factory. In that story, he argues that: 1) specialization of jobs into simple tasks increases productivity. 2) cross-training is critical for productivity. 3) coordination is the biggest problem for factory efficiency. 4) one worker should be assigned all the tasks in pin construction.

1) specialization of jobs into simple tasks increases productivity.

One of the problems with making all the decisions at the top of a business organization is the costliness of: 1) specific information. 2) general information. 3) advanced technology. 4) market power.

1) specific information.

Identify a critical aspect of corporate organization. 1) the assignment of decision rights within a company 2) the cost structure of the firm 3)the pricing strategies of the rival firms 4)the capita to labor ratio

1) the assignment of decision rights within a company

In the principal-agent model, at the employee's optimal effort choice: 1) the net benefits of effort are maximized. 2) the marginal costs of efforts exceed the marginal revenue. 3) the incentive coefficient of effort is very high. 4) the marginal benefit of effort is negative.

1) the net benefits of effort are maximized.

If a work performance measure is based on both objective and subjective measures, the objective measure would be: 1) the number of units produced. 2) employee dependability. 3) quality of units produced. 4) employees' willingness to cooperate with coworkers.

1) the number of units produced.

In the Celtex case study, Leo Garcia, President of the synthetic chemical division, regularly fails to sell his products to and through the consumer products division. This is because: 1) there is a market-based alternative to his products that are cheaper. 2) Celtex has a faulty organizational structure that regularly cheats Garcia. 3) the head of the consumer products division does not understand the difference between price and value. 4) Garcia produces inferior products.

1) there is a market-based alternative to his products that are cheaper.

If the technology, the nature of competition, or the regulatory environment change in an industry, then 1)the appropriate organizational architecture will change too. 2)a good organizational architecture will shut down. 3)the organizational architecture will be able to restore the former market environment. 4)the industry will increase production.

1)the appropriate organizational architecture will change too.

Consider the salary of Mary Sue Nelson, a sales agent for Plain Truth Advertising. Her weekly compensation package is W=1,000+0.4Q, where Q is her dollar volume of sales. Her productivity is Q=200e+ μ, where e denotes her hours of effort and µ, is a random variable with mean 0. If Mary Sue works an additional hour, the expected value of her wages rises by: 1) $0.00. 2) $80.00. 3) $200.00. 4) $1,000.00.

2) $80.00.

If a firm with monopoly pricing power in the market faces a demand curve of P = 2,000 - 2Q and marginal cost of MC = 1,100 + 2Q, then the firm will produce: 1) 542 units. 2) 150 units. 3) 200 units. 4) 900 units.

2) 150 units.

If a competitive firm can sell its product at $1,600 per unit and the marginal cost of the firm is MC = 1,100 + 2Q, then the firm will produce: 1) 1,084 units. 2) 250 units. 3) 160 units. 4) 1,100 units.

2) 250 units.

Currently XYZ's compensation system is such that only top managers receive compensation based on the company's performance, while everybody else in the company receives a fixed salary. Moreover, top managers have full discretion over the launch of new products. Due to the failure of the last three products launched by XYZ, top managers are contemplating modifying the allocation of decision rights concerning new products. What changes would make more economic sense? 1) Delegating decision rights down the ladder to those employees who are likely to have more specific knowledge and leaving their current compensation scheme unchanged 2) Delegating decision rights down the ladder to those employees who are likely to have more specific knowledge and changing their compensation by awarding them bonuses based on their performance 3) Leaving the allocation of decision rights unchanged, but changing the compensation of all the employees by awarding them bonuses based on their performance 4) Giving themselves good bonuses and reducing benefits for all other employees

2) Delegating decision rights down the ladder to those employees who are likely to have more specific knowledge and changing their compensation by awarding them bonuses based on their performance

Which of the following is an important lesson to keep in mind during benchmarking? 1) Benchmarked firms should be made aware of the said firm's motivation. 2) Differences in environments of the benchmarked firms should be taken into account. 3) Differences in the strength and activities of the labor unions should be taken into account. 4) Differences in environments of the benchmarked firms are not important.

2) Differences in environments of the benchmarked firms should be taken into account.

Which of the following can be used to predict the outcome of a game if there are no dominant strategies in the game? 1) Secure strategy 2) Nash equilibrium 3) First-mover advantage 4) Prisoner's dilemma

2) Nash equilibrium

We have two players A and B, where A can go L or R, and B can go T, B or R. The payoffs are decided after this. Which of the following is a characteristic of such games? 1) Dominant strategies 2) Simultaneous moves 3) Sequential moves 4) Backward induction

2) Simultaneous moves

FarAwayDrive Inc. has recently increased the price of its golf balls from $4.00 to $6.00. In response to this increase in price, sales decreased from 2,200 to 1,800 units. If no other information concerning the demand is available, which of the following is true about the sensitivity of demand (using the ARC or mid-points formula) for FarAwayDrive's golf balls? 1) The ARC-elasticity (midpoints formula) of demand is 2.0. 2) The ARC-elasticity (midpoints formula) of demand is ½ or .50. 3) The ARC-elasticity (midpoints formula) of demand is 2/3 or .667. 4) The ARC-elasticity (midpoints formula) of demand is 4/11 or .364.

2) The ARC-elasticity (midpoints formula) of demand is ½ or .50.

Assume Barbara likes driving fast, but hates getting injured. If Congress passes a law for mandatory airbags, Barbara is likely to experience an increased number of accidents. Why? 1) The benefits of driving fast increase. 2) The expected cost of an accident at any given speed decreases. 3) Barbara will defy the law and not have airbags, since she thinks no one is going to enforce installing airbags in cars. 4) Barbara is confident that she can drive flawlessly since others will have airbags.

2) The expected cost of an accident at any given speed decreases.

Assume the demand curve for t-shirts is Q = 180 - 15P or P = 12 - 0.0667Q. When are total revenues maximized? 1) When the price is $3.00 2) When the price is $6.00 3) When the price is $8.00 4) When the price is $6.66

2) When the price is $6.00

FancyFoods restaurant decided to introduce an all-you-can-eat buffet on Tuesdays and Wednesdays to increase business. They found that they acquired a whole new set of customers, most of whom were very big eaters. After a time, they increased the price of the buffet. FancyFoods suffered from the problem of: 1) excessive high costs. 2) adverse selection. 3) incentives 4) implicit contracts

2) adverse selection.

Bob, CEO of AutoMart Company, is given the right to make all the important decisions in an organization. This is an example of: 1) decentralized decision making. 2) centralized decision making. 3) bundling. 4) a nonstandard practice within a hierarchy.

2) centralized decision making.

If a strategic move is credible, it is likely to: 1) be the dominant strategy of all the players in the game. 2) change the actions of rivals. 3) result in repeated, sequential interactions. 4) result in self-enforcing outcomes.

2) change the actions of rivals.

J.T. Smith's company, Gamemaker, sells gambling equipment to gaming service companies. Since the quality of the equipment is difficult to monitor and gamblers are often the source of machine failure, Smith could cheat on the level of machine quality. However, Smith has a strong quality assurance program. A primary reason for that may be: 1) cost containment. 2) company reputation. 3) the need for reinforcement. 4) the asymmetric information Smith holds on quality.

2) company reputation.

In general, the use of accounting-based performance analysis is more effective in: 1) decision management. 2) decision control. 3) audit review of failed enterprises. 4) residual income.

2) decision control.

Let EdGI refer to the income elasticity for gasoline. Suppose EdGI= 2, then this means that if income: 1) increases by 2%, QdG will increase by 1%. 2) decreases by 1%, QdG will decrease by 2%. 3) increases by $1, QdG will decrease by 2%. 4) decreases by 2%, QdG will decrease by 1%.

2) decreases by 1%, QdG will decrease by 2%.

Dan Unowsky assigns his computer repairers four tasks: customer service, replacement of broken parts, clean-up of equipment, and sale of used equipment to customers. If the company provides a 10% commission for all sales made by employees, then: 1) employees will clearly emphasize the clean-up task. 2) employees may ignore other tasks when faced with a potential sale. 3) replacement of broken parts will clearly be favored by employees. 4) the entire production process will be speeded up by the sales incentive.

2) employees may ignore other tasks when faced with a potential sale.

In the benchmark competitive case, the firm will expand the hiring of employees until the marginal revenue product is: 1) less than the market wage rate. 2) equal to the market wage rate. 3) greater than the market wage rate. 4) the square of the market wage rate.

2) equal to the market wage rate.

Most governments enforce patents, copyrights, and trademarks. While these are clear restrictions on free trade, it is believed that inventors and investors: 1) generally oppose these restrictions as monopolistic. 2) favor these restrictions since they promote inventive activities. 3) are indifference since they have no impact on business. 4) prefer low prices to patents.

2) favor these restrictions since they promote inventive activities.

Walmart built the base of its retailing market power in small cities and towns. In most of those towns, the size of the marketplace is so small that only one large retailer can successfully exist. This resulted in: 1) adverse selection. 2) first-mover advantage. 3) secure strategy. 4) extension form.

2) first-mover advantage.

In the TruLite boxing department, management finds that the production team maintains several boxes of lights in a nearby storage closet. On days when the assembly line breaks down, the boxes are added back at the end of day to meet production goals. This is an example of: 1) beating the benchmark. 2) gaming the production system. 3) random elements in production. 4) risk premium adjustment factors.

2) gaming the production system.

The basic incentive problem is that owners and employees: 1) are both concerned about sales maximization. 2) have fundamentally different objectives. 3) need government assistance to solve differences. 4) generally operate in perfectly competitive markets.

2) have fundamentally different objectives.

Assume that the quantity of X is measured on the horizontal axis, and the quantity of Y is measured on the vertical axis. Assume that the price of X is $3 and the price of Y is $6. If Amanda has $100 to spend on X and Y, then 1) she can buy, at most, 30 units of good X. 2) her budget line has a slope of -1/2. 3) her budget line has a slope of -3. 4) she can buy, at most, 15 units of good X.

2) her budget line has a slope of -1/2.

The marginal product curve of input Y shows: 1) how the quantity of output produced changes for each amount of input Y, whether or not all other inputs are held constant. 2) how the quantity of output produced changes for each amount of input Y, holding all other inputs constant. 3) how the average quantity of output produced varies with input Y, whether or not all other inputs are held constant. 4) how the average quantity of output produced varies with input Y, holding all other inputs constant.

2) how the quantity of output produced changes for each amount of input Y, holding all other inputs constant.

If an employee makes a point of meeting his manager every morning to detail the positive outcomes of the work done the previous day, this is an example of: 1) project initiation. 2) influence costs. 3) project monitoring. 4) decentralization of decision making.

2) influence costs.

If property rights are enforced and contracts in trade are legally respected, it is usually assumed that: 1) output will begin to fall. 2) investment will be encouraged. 3) transactions costs will rise. 4) government is unnecessary.

2) investment will be encouraged.

In a perfectly competitive market, the price faced by a firm is equal to its: 1) average variable cost. 2) marginal revenue and average revenue. 3) total cost. 4) average revenue.

2) marginal revenue and average revenue.

By offering a compensation package rich in fringe benefits and slightly lower pay, a firm is more likely to attract: 1) single employees. 2) married employees. 3) older or senior employees. 4) unskilled employees.

2) married employees.

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: 1) maximize revenue for a given price. 2) maximize output for a given budget. 3) maximize returns for a given budget. 4) minimize output for a given budget.

2) maximize output for a given budget.

We have two players A and B, where A moves first and can go L or R, and B moves next and can go T, B, or R. A moves again and can go L, R, or M. The payoffs are decided after this. The best approach to solve such games is through: 1) dominant strategies. 2) mixed strategies. 3) forward induction. 4) backward induction.

2) mixed strategies.

Dan Heath is the majority owner of Plain Truth Advertising. He hires Shirley Downs as the chief executive officer (CEO). In terms of an economic model, Mr. Heath is the ______ and Ms. Downs is the ______. 1) agent; principal. 2) principal; agent. 3) principal; intermediary. 4) agent; intermediary.

2) principal; agent.

FancyFoods provides a monthly bonus for servers when sales volume exceeds 120 percent of the same month last year. The size of bonus is tied to the individual server's sales of meals in comparison to an average server's sales. This system attempts to introduce a(n): 1) risk-sharing contract. 2) relative performance contract. 3) absolute performance contract. 4) group performance contract.

2) relative performance contract.

Special interest groups, in the theory of regulation, may be defined as: 1) publicly spirited individuals who will benefits from regulation. 2) self-interested individuals who benefit from regulation. 3) self-interested individuals who will suffer from regulation. 4) publicly spirited individuals who will suffer from regulation.

2) self-interested individuals who benefit from regulation.

If decision makers do not bear the major wealth effects of their decisions, then: 1) the same person in the management structure must hold decision management and control. 2) separate decision makers must hold decision management and decision control. 3) decision management is clearly integrated with decision control. 4) the same managers hold initiation and ratification of decisions.

2) separate decision makers must hold decision management and decision control.

Each year, most U.S. companies bring a Certified Public Accountant (CPA) firm to audit their books. This is an example of: 1) a lack of trust between the companies and the managers. 2) separation of decision management and decision control. 3) the impact of influence costs. 4) the benefits of decentralization or outsourcing.

2) separation of decision management and decision control.

If TruLite's factory workers receive an hourly wage, described by the equation; Compensation = $5.00 + .10Q, where Q is the number of light switches installed per hour, then: 1) the employee can remain completely risk-averse. 2) the employee must accept risk of production variability. 3) output becomes a subjective measure of performance. 4) there are no compensating differentials.

2) the employee must accept risk of production variability.

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: 1) coordination costs. 2) the trade-off between low cross-training costs and reduced flexibility of the employees. 3) the absolute need for every employee to be trained in all aspects of PC repair. 4) managerial ineptitude.

2) the trade-off between low cross-training costs and reduced flexibility of the employees.

If TruLite's factory workers receive an hourly wage, described by the equation; Employee compensation = $5.00 + 0.10Q, where Q is the number of light switches installed per hour, then: 1) $5.00 is the basic incentive to produce. 2) Q is entirely dependent on random elements in the production system. 3) $0.10 is the incentive to increase effort. 4) effort is unimportant in the performance evaluation system of the firm.

3) $0.10 is the incentive to increase effort.

If Tiger Toys faces a demand curve of P = 85 − 0.25Q and a MC = ATC = 20, then the markup would be: 1) $52.50. 2) $20.00. 3) $32.50. 4) $65.00.

3) $32.50.

If output Q = 8.5e (e = units of effort) and Wage, W = $6.70 + 0.25Q, then 20 units of effort are worth ______ to the firm. 1) $170.00 2) $0.425 3) $49.20 4) $35.80

3) $49.20

A firm's average total cost is minimized at $5/unit when it produces 10 units. What is the marginal cost when the firm produces 10 units? 1) Less than $5/unit 2) Greater than $5/unit 3) $5/unit 4) $10/unit

3) $5/unit

If Tiger Toys faces a demand curve of P = 85 − 0.25Q and a MC = ATC = 20, then the output would be: 1) 65 units. 2) 85 units. 3) 130 units. 4) 32.5 units.

3) 130 units.

Consider the salary of Mary Sue Nelson, a sales agent for Plain Truth Advertising. Her compensation package for a week is W=1,000+0.4Q, where Q is her dollar volume of sales. Her productivity is = 200e+ μ , where e denotes her hours of effort and µ is a random variable with mean 0. She has an effort cost of C= e2. Under this contract, her choice of effort will be: 1) 0 hours per week. 2) 20 hours per week. 3) 40 hours per week. 4) 80 hours per week.

3) 40 hours per week.

If a company division is operated as a revenue center and its demand curve is P = 200 - 2Q, how many units should it produce per day? 1) 0 2) 25 3) 50 4) 100

3) 50

Which one of the following is a source of conflict between owners and managers? 1) A manager's effort leaves the firm's value and the manager's utility unchanged. 2) A manager's effort decreases the firm's value and the manager's utility. 3) A manager's effort increases the firm's value but decreases the manager's utility. 4) A manager's effort increases the firm's value and the manager's utility.

3) A manager's effort increases the firm's value but decreases the manager's utility.

Which of the following is not a problem with subjective performance evaluations? 1) Shirking among supervisors 2) Forced distributions of results by upper management 3) Ability to rank employees on a standard rating scale 4) Use of influence to bias outcomes

3) Ability to rank employees on a standard rating scale

Assume the current market price of candles is such that there is a surplus (i.e., excess supply). Which of the following best describes the adjustment process in a competitive market? 1) As the price increases, the quantity demanded and the quantity supplied decrease. 2) As the price increases, the quantity demanded decreases while the quantity supplied increases. 3) As the price decreases, the quantity demanded increases while the quantity supplied decreases. 4) As the price decreases, the quantity demanded decreases while the quantity supplied increases.

3) As the price decreases, the quantity demanded increases while the quantity supplied decreases.

Assume the demand function for basketballs is given by QD = 150 −3P + 0.1I, where P = price of a basketball, and I = average income of consumers. Also, assume the supply of basketballs is given by QS = 2P. If the market for basketballs is perfectly competitive, and the average income is equal to $1,500, what is the equilibrium price and quantity? What if a 10 percent income tax is introduced? 1) Before the tax, the equilibrium price was $60, and 120 basketballs were traded. The introduction of an income tax would have no effect on the equilibrium price and quantity. 2) Before the tax, the equilibrium price was $60, and 120 basketballs were traded. Once the income tax is introduced, the price would decrease by $6, and only 108 basketballs would be traded. 3) Before the tax, the equilibrium price was $60, and 120 basketballs were traded. Once the income tax is introduced, the price would decrease by $3, and only 114 basketballs would be traded. 4) Before the tax, the equilibrium price was $60, and 108 basketballs were traded. Once the income tax is introduced, the price would decrease by $6, and only 120 basketballs would be traded.

3) Before the tax, the equilibrium price was $60, and 120 basketballs were traded. Once the income tax is introduced, the price would decrease by $3, and only 114 basketballs would be traded.

Which of the following is not a cost of specialized task assignment? 1) Foregone complementarities across tasks 2) Functional myopia 3) Comparative advantage of specialization 4) Reduced flexibility

3) Comparative advantage of specialization

Which one of the following is a big problem in large groups? 1) Useless group leader 2) Adverse selection problem 3) Free-rider problem 4) Buyer-supplier conflicts

3) Free-rider problem

Edt = - 5. This means that if: 1) Pt increases by 5%, then Qdt will decrease by 1%. 2) Qdt increases by 5%, Pt will decrease by 1%. 3) Pt increases by 1%, Qdt will decrease by 5%. 4) Pt decreases by $1.00, Qdt will decrease by 5 units.

3) Pt increases by 1%, Qdt will decrease by 5%.

In general, which of the following implies that a marginal cost curve will eventually increase as a firm produces more output? 1) Profit maximizing behavior by the firm 2) A production function displaying increasing returns to scale 3) The law of diminishing returns 4) The law of equi-marginal returns

3) The law of diminishing returns

Which of the following regulatory procedures transfers wealth from consumers to producers? 1) Property rights. 2) Transactions costs. 3) Zoning restrictions. 4) Banning guns.

3) Zoning restrictions.

If a manager who does not own a company is allowed to make decisions for the company, then: 1) the decisions will usually be effective. 2) inappropriate decisions will be taken. 3) a control system of rewards and evaluation must be set up. 4) the manager usually assumes the same position as the owner.

3) a control system of rewards and evaluation must be set up.

According to the text, successful firms tend to set up 1) an organizational architecture that is complex and decisions are "top-down." 2) an organizational architecture that is least expensive and decisions are "top-down." 3) an organizational architecture that links decision making with decision rights. 4) an organizational architecture that keeps decision rights reserved for the senior management.

3) an organizational architecture that links decision making with decision rights.

Marginal analysis refers to the 1) relationship between the cause and effect of an economic event. 2) study of trade relations based on absolute cost differences. 3) comparison of benefits and costs of choosing a little more or a little less of a good. 4) calculation of opportunity costs of an economic activity.

3) comparison of benefits and costs of choosing a little more or a little less of a good.

Specialized task assignment's greatest cost is ignoring the foregone ______ across tasks. 1) comparative advantage 2) flexibility 3) complementarities 4) lower cross-training costs

3) complementarities

Organizational architecture varies from firm to firm. The three important EXTERNAL determinants of a firm's administrative structure are: 1) decision rights, rewards, and technology. 2) government regulation, technology, and decision rights. 3) government regulation, technology, and markets. 4) decision rights, rewards, and evaluation systems.

3) government regulation, technology, and markets.

The long-run price elasticity of demand for a product is generally ______ the short-run elasticity for the same product. 1) lower than 2) equal to 3) higher than 4) not comparable to

3) higher than

In the textbook, there is an example of a software firm in which the managers provided a financial incentive to get rid of software bugs. The result was that software writers added more bugs into the software. This example shows that 1) financial incentives should never be used. 2) most employees are corrupt. 3) incentives can create perverse effects. 4) high-tech firms are unique.

3) incentives can create perverse effects

The gains from general training in human capital tend to go to the: 1) employing firm and not to the individual. 2) federal government in the form of higher taxes. 3) individual and not to the employing firm. 4) parents since they paid for the education in the first place.

3) individual and not to the employing firm.

In an internal labor market, employees often spend too much time lobbying for promotions or preferred job assignments. These are referred to as: 1) administrative costs. 2) market costs. 3) influence costs. 4) human capital costs.

3) influence costs.

When a firm establishes a long-term contract with another firm where a firm acquires an asset such as a machine or a building through a rental agreement, this is a: 1) standard supply contract. 2) joint venture. 3) lease contract. 4) franchise agreement.

3) lease contract.

Robinson pays $100 for tickets to see his favorite sports team play. With 10 minutes left in the game, his team is losing heavily and has no chance of winning the game. Robinson chooses to stay until the end of the game because he wants to get the full value for his admission price. As an economist, you should advise Robinson to 1) stay until the end of the game as his intuition is correct. 2) stay until the end of the game as he might be heckled on the way out. 3) leave the game if his marginal benefit of leaving is greater than marginal cost, as the admission price is a sunk cost. 4) leave the game now as the line to exit the stadium is shorter now.

3) leave the game if his marginal benefit of leaving is greater than marginal cost, as the admission price is a sunk cost.

Independent distributors of soda can free ride on the name brand of the producing company. Two solutions to this problem are: 1) joint asset ownership and long term contracts. 2) open market transactions and free distribution of production secrets. 3) linked advertising and exclusive territories. 4) open market transactions and exclusive territories.

3) linked advertising and exclusive territories.

One of the problems of transfer prices comes from the successive impact of the prices as the product moves downstream toward the consumer. At each step, the transfer price becomes the ______ for the next part of the company. 1) market price 2) total cost 3) marginal cost 4) negotiated price

3) marginal cost

In most models of managerial conflict, the owner is the ______ and the manager is the ______. 1) wage earner; stockholder 2) employee; director 3) principal; agent 4) resource; resource owner

3) principal; agent

It is better to pool risks because you can: 1) increase your income. 2) reduce your expected income but increase its standard deviation. 3) reduce the variability of expected income. 4) increase your expected income.

3) reduce the variability of expected income.

The economic theory of regulation treats politicians as: 1) publicly spirited individuals who work for the public welfare. 2) corrupt individuals who sell contracts to the highest bidders. 3) self-interested individuals who benefit themselves by supplying legislation. 4) people who only represent the small segment of the population that elects them.

3) self-interested individuals who benefit themselves by supplying legislation.

Suppose a family's budget line is such that the horizontal axis shows the amount of food consumed, while the vertical axis measures the consumption of all other goods. Suppose this family receives food stamps. This will cause the budget line to 1) rotate leftward along the vertical axis. 2) pivot along the horizontal axis. 3) shift rightward along the horizontal axis. 4) shift leftward.

3) shift rightward along the horizontal axis.

The term Darwinism is important because it indicates 1) the randomness of existing companies. 2) that the surviving companies are the best in the absolute sense. 3) the capability to transform as the external environment changes. 4) the existence of a higher intelligence that promotes success.

3) the capability to transform as the external environment changes

When asset specificity is very high and there is a lot of market uncertainty, then it is best for a firm to: 1) buy in the open market. 2) use a long term contract. 3) vertically integrate. 4) engage in a joint venture.

3) vertically integrate.

Consider the salary of Mary Sue Nelson, a sales agent for Plain Truth Advertising. Her wage package is W=1,000+0.4 Q, where Q is her dollar volume of sales. Her productivity is Q=200e+ μ, where e denotes her hours of effort and µ 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: 1) $200.00. 2) $1,000.00. 3) $3,060.00. 4) $4,200.00.

4) $4,200.00.

Assume the demand curve for skirts in Europe is P = 100 - QE (or Qe = 100 - P), while the U.S. demand is P = 100 - ¼QUS. (or Qus = 400 - 4P). Over the range of prices, which demand is more price elastic? 1) Demand in the U.S. is more elastic. 2) Demand in Europe is more elastic. 3) It depends on the price level. 4) Demand in the U.S. and Europe have the same elasticity for any price level.

4) Demand in the U.S. and Europe have the same elasticity for any price level.

Which of these is a drawback of forming an internal reference group and using the group average to assess normal performance? 1) High influence cost incurred by employees 2) Forced distributions 3) Shirking among supervisors 4) Explicit employee collusion that tends to hold down the benchmark

4) Explicit employee collusion that tends to hold down the benchmark

The 1890 Sherman Act was legislated by the: 1) SEC. 2) EPA. 3) FDA. 4) FTC.

4) FTC.

Which of the following is not a cost of decentralization of corporate decision making? 1) Incentive problems 2) Coordination costs and failures 3) Less effective use of central information 4) More effective use of local knowledge

4) More effective use of local knowledge

Assume that Pyrotex Inc. estimates the demand for its fireworks to be linear. If the current price charged by Pyrotex is such that the elasticity of demand is equal to 2.5, which of the following statements is true? 1) Pyrotex will surely increase its profits by decreasing the price of fireworks. 2) Pyrotex will surely increase its profits by increasing the price of fireworks. 3) Pyrotex cannot increase its profits by changing the price of fireworks. 4) Not enough information is provided to determine whether Pyrotex is currently maximizing its profits.

4) Not enough information is provided to determine whether Pyrotex is currently maximizing its profits.

Assume the demand function for scooters is given by QD = 20,000 - 10P + 0.4I, where P = price of a scooter, and I = average income of consumers. Also, assume the supply function of scooters is given by QS = 40P. If the market for scooters is perfectly competitive, and the average income of consumers is $50,000, what are the equilibrium price and quantity in this market? 1) The equilibrium price is $16,000, and 800 scooters are traded. 2) The equilibrium price is $1,600, and 32,000 scooters are traded. 3) The equilibrium price is $800, and 16,000 scooters are traded. 4) The equilibrium price is $800, and 32,000 scooters are traded.

4) The equilibrium price is $800, and 32,000 scooters are traded.

The extra wage that is paid to an individual to attract him/her to a less desirable job is called: 1) the benchmark competitive wage. 2) the general training human capital difference. 3) the specific training human capital difference. 4) a compensating wage differential.

4) a compensating wage differential.

Two contract terms that reduce free-rider problems are: 1) double markups and two part pricing. 2) advertising provision and double markups. 3) exclusive territories and double markups. 4) advertising provision and exclusive territories.

4) advertising provision and exclusive territories.

The choice of transfer-pricing method: 1) merely reallocates total company profits among its smaller units. 2) does nothing to profits of sub-units. 3) merely reallocates total company profits among its bigger units. 4) affects the firm's total profits.

4) affects the firm's total profits.

A company might charge a customer different prices per unit, depending upon the number of units purchased. This is called: 1) bundling. 2) two-part tariff. 3) price discrimination. 4) block pricing.

4) block pricing.

Independent distributors of a brand name product: 1) cannot free-ride on the product's reputation and produce optimal sales. 2) can free-ride on the product's reputation and produce optimal sales. 3) cannot free-ride on the product's reputation and produce suboptimal sales. 4) can free-ride on the product's reputation and produce suboptimal sales.

4) can free-ride on the product's reputation and produce suboptimal sales.

Benchmarking occurs when a firm: 1) compares its performance with its previous performance. 2) sets up strategic plans for the future based on its current performance. 3) advises other firms on organization, based on its success. 4) compares the strategies of other firms in the industry to derive its strategy.

4) compares the strategies of other firms in the industry to derive its strategy.

A household-products manufacturing firm was required to examine its organizational architecture in order to survive in the market. The three aspects of its organization that it looked into are 1) decision rights, rewards, and technology. 2) government regulation, technology, and decision rights. 3) government regulation, technology, and markets. 4) decision rights, rewards, and evaluation systems.

4) decision rights, rewards, and evaluation systems.

Price discrimination is usually defined as selling a product to different customers at: 1) the same price even though costs of service are different. 2) different prices as costs of service are different. 3) the same price as costs of service are the same. 4) different prices even though costs of service are the same.

4) different prices even though costs of service are the same.

Always Round Tire has been in the tire business since 1963. It has several plants with different levels of technology. Over the years, the company has worked with its employees to figure out how to produce a tire for less. This incumbent advantage the firm has over potential newcomers is the: 1) result of scale economies. 2) impact of licenses and patents. 3) clear threat of using its excess capacity. 4) effect of its learning curve.

4) effect of its learning curve.

When a firm establishes a long-term contract with another firm where the first firm grants a second independent business the rights to use the first firm's name, reputation and business format, this is a: 1) standard supply contract. 2) joint venture. 3) lease contract. 4) franchise agreement.

4) franchise agreement.

Kevin Freeman is the head of a team developing plastic knee replacements. Each member of the team brings specialized knowledge to the innovation process. Kevin noticed that the specialist on bone and artificial materials compatibility is always late to meetings and contributes little. This is an example of the: 1) benefits of the use of dispersed specific knowledge. 2) costs of employee buy-in. 3) costs of collective-action problems. 4) free-rider problem.

4) free-rider problem.

For a given compensation potential (isocost curve), an employee with a large family is more likely to pick a wage-benefit mix that emphasizes: 1) wages. 2) incentive piece rates. 3) risk-averse commission plans. 4) fringe benefits.

4) fringe benefits.

You purchase both potatoes and gasoline regularly. Your income increases and you purchase more gasoline and less potatoes. This implies that 1) gasoline has a negative substitution effect. 2) potatoes are normal goods. 3) gasoline is an inferior good. 4) gasoline is a normal good.

4) gasoline is a normal good.

Transfer price refers to the price at which: 1) goods are transferred from one location to another. 2) services are transferred overseas for a cheaper rate. 3) goods are sold to loyal customers without shipping and delivery cost. 4) goods and services are transferred within a business.

4) goods and services are transferred within a business.

Assume that the quantity of oranges is measured on the horizontal axis and the quantity of apples is measured on the vertical axis. If Andy likes both apples and oranges, then his Marginal Rate of Substitution along the indifference curve indicates 1) how many oranges he is willing to give up in order to obtain one more apple. 2) how many additional oranges he wants in order to give up two apples. 3) how many oranges he is willing to give up in order to get rid of one apple. 4) how many apples he is willing to give up in order to obtain one more orange.

4) how many apples he is willing to give up in order to obtain one more orange.

In the basic competitive model of labor markets, we see that: 1) individual firms and workers can exert a lot of influence over the wage rate. 2) there are only long-term contracts. 3) jobs are not identical to each other. 4) individual firms and workers have no control over the wage rate paid and received.

4) individual firms and workers have no control over the wage rate paid and received.

Human capital is a term that characterizes: 1) the number of workers in a company who are productive. 2) firms that sell their products to customers directly. 3) individuals who buy skills from the companies they work for. 4) individuals with a set of skills that they rent to employers.

4) individuals with a set of skills that they rent to employers.

Double markups refer to the tendency of the: 1) manufacturer and the distributor to increase the product's price above AC. 2) manufacturer to increase the product's price by more than twice the MC. 3) distributor to increase the product's price by more than the manufacturer. 4) manufacturer and the distributor to increase the product's price above MC.

4) manufacturer and the distributor to increase the product's price above MC.

When a worker specializes in one task, he focuses on that one function in the production process, ignoring the whole system. This is likely to: 1) increase the cross-training costs. 2) eliminate trade-offs since only one task is undertaken by each employee. 3) lead to greater complementarity between one task and another. 4) result in functional myopia that reduces overall productivity.

4) result in functional myopia that reduces overall productivity.

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 would find that: 1) the supply of pollution rights had increased. 2) the prices of pollution rights had fallen. 3) the relative costs of pollution control equipment had gone up. 4) the prices of pollution rights had gone up.

4) the prices of pollution rights had gone up.

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 would find that: 1) the supply of pollution rights had increased. 2) the prices of pollution rights had fallen. 3) the relative costs of pollution control equipment had gone up. 4) the relative costs of pollution control equipment had fallen.

4) the relative costs of pollution control equipment had fallen.

In a Nash equilibrium, firms are clearly strategically interdependent and: 1) they cooperate with each other to determine market outcomes. 2) they determine price in a closed auction bid system. 3) they are dependent on differentiated goods. 4) they are non-cooperative in determining market outcomes.

4) they are non-cooperative in determining market outcomes.

Two contract terms that reduce transfer pricing problems are: 1) double markups and two-part pricing. 2) quotas and double markups. 3) exclusive territories and two-part pricing. 4) two-part pricing and quotas.

4) two-part pricing and quotas.

The informativeness principle tells us that: 1) information is overrated because employees can always lie about their performance, and detecting is costly and counter-productive. 2) one must use as much information as possible to develop compensation contracts, even if the cost of obtaining the information is unreasonable. 3) one must only use information that is necessary to develop compensation contracts, as long as the cost of obtaining the information is reasonable. 4) you must use as much information as possible to develop compensation contracts, as long as the cost of obtaining the information is reasonable.

4) you must use as much information as possible to develop compensation contracts, as long as the cost of obtaining the information is reasonable.