Managerial economics and business strategy 8th edition by baye and prince test bank

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-03 Explain the optimal manner of procuring different types of inputs.. Topic: Managerial Comp

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Managerial Economics & Business Strategy 8th edition by Michael R Baye, Jeffrey T Prince Test Bank

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Chapter 06 The Organization of the Firm Answer Key

Multiple Choice Questions

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

A Commission plans for salesmen

Learning Objective: 06-05 Discuss three forces that owners can use to discipline managers

Topic: Managerial Compensation and the Principal-Agent Problem

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Which of the following is NOT an incentive scheme to ensure that workers do a good job?

A Paying waitresses low wages, but allowing them to collect tips

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B Profit-sharing plans in large companies

Long-term contracts become longer:

A when specialized investment becomes more important

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Topic: Optimal Input Procurement

A firm might choose to produce its own inputs if:

A specialized investment is not important

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D spot markets for the input exist

AACSB: Reflective Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-03 Explain the optimal manner of procuring different types of inputs

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A high transaction costs

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

A opportunism is not a problem

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The disadvantage of vertical integration is that:

A relationship-specific exchange may cause hold-up

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In the absence of worker incentives:

A everyone always gives maximum effort

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

A the losses of specialization

B increased transaction costs

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Shirking can take the form of:

A long lunch hours

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Topic: Forces that Discipline Managers

Suppose compensation is given by W = 512,000 + 217π + 10.08S, where W = total

compensation of the CEO, π = company profits (in millions) = $200, and S = sales (in millions) = $400 How much will this CEO be compensated?

Suppose compensation is given by W = 512,000 + 217π + 10.08S, where W = total

compensation of the CEO, π = company profits (in millions) = $200, and S = sales (in millions) = $400 What percentage of the CEO’s total earnings are tied to profits of the firm?

A 8.2 percent

B 10.9 percent

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23

A manager who tries to enhance worker effort by tying workers’ compensation to the

profitability of the firm is using:

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Topic: The Manager-Worker Principal-Agent Problem

An example of a job that usually involves a revenue-sharing plan would be:

A waiters and waitresses

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

A does not induce hard or better work

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

A Paying typists a fixed amount per page

A potential problem with piece-rate plans is that:

A workers will produce a large quantity

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

A quality control mechanisms

Transaction costs refer to:

A fixed costs of capital

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Spot checks work because of:

A the promise of a reward

39 An increase in the likelihood of a dismissal:

A raises productivity at an increasing rate

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High transaction costs:

A occur when specialized investment is not important

Long-term contracts are NOT efficient if:

A a firm engages in relationship-specific exchange

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Which of the following occurs as firm size grows?

A A decrease in the number of managers needed

Which of the following mergers is an example of vertical integration?

A Bethlehem Steel purchases U.S Steel

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B IBM purchases a California computer chip company

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The principal’s goals are NOT in line with the goals of:

A any other principal

The agent is an individual:

A who acts independently of the principal

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

A do not always coincide with those of the principal

B coincide with those of the principal

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C do not overlap with those of the principal

Principal-agent problems do NOT arise between:

A stockholders and managers

Solving the principal-agent problem ensures that the firm is operating:

A on the production function

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If a manager is not the owner, the manager:

A receives the full benefit of good decisions

When the owner runs the business:

A he does not bear the full cost of a bad decision

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

A contracted market price

A firm chooses the institution to purchase inputs:

A which minimizes the transactions costs of obtaining inputs

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A firm manager is an agent hired by the:

A owner to control the production process

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A control the production process

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

A have incentives to behave as principals

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Long-term contracts are LESS likely when:

A specialized investments are important

Under a profit-sharing compensation scheme, the manager will:

A shirk all day

B not shirk all day

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A higher in company-owned restaurants

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The cost to a manager of doing a poor job running the firm is:

A a decrease in his fixed salary

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A profit-sharing pay scheme:

A increases both productivity and profits

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Blooms: Understand

83

A potential problem with paying workers based on a piece rate is that:

A effort cannot be expended engaging in quality control

Which of the following is NOT a benefit associated with producing inputs within a firm?

A reduction in transaction costs

In order for spot checks to work:

A employees must be monitored continually

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B the time of the checks must not be predictable

predictable are correct

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88

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

A Increases in transaction costs

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91

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

A Commission plans for salespeople

A positive side of long-term contracts is:

A low transaction costs

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The activity known as shirking is LEAST likely to occur when:

A workers are not monitored

Suppose compensation is given by W = 450,000 + 220 π + 15S, where W = total

compensation of the CEO, π = company profits (in millions) = $300, and S = sales (in millions) = $500 What percentage of the CEO’s total earnings is tied to profits of the firm?

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AACSB: Analytic

Blooms: Apply

96

Revenue sharing tries to induce worker effort by linking:

A worker compensation to profits

A potential problem with piece-rate plans is that:

A workers will have a tendency to under-produce the good

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Which of the following is NOT a transaction cost associated with using inputs?

A Time spent negotiating labor contracts with union workers

As firms increase in size, they tend to experience a:

A decrease in the need for managers

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A lower in franchise restaurants

103 Generally, revenue-based incentive schemes:

A reduce incentives to produce low-quality products

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105

Point A in the figure below is:

A efficient since it produces 20 units of output at the lowest possible cost

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AACSB: Analytic

Blooms: Analyze

Difficulty: 1 Easy

106

Point B in the figure below is:

A efficient since it produces 20 units of output at the lowest possible cost

A increased by half

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Difficulty: 1 Easy

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Piece rates are typically a solution to the:

A manager-worker, principal-agent problem

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Time clocks are typically a solution to the:

A manager-consumer, principal-agent problem

Spot checks are typically a solution to the:

A manager-consumer, principal-agent problem

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C Time clocks and spot checks

Long-term contracts become shorter:

A when specialized investment becomes less important

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136

compensation of the CEO, π = company profits (in millions) = $340, and S = sales (in millions) = $700 What percentage of the CEO’s total earnings is tied to sales of the firm?

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a A major oil company refines gasoline from crude oil produced by oil wells that it owns

b Transcontinental, an interstate natural-gas pipeline, has a legal obligation to purchase a specified amount of gas per week from a well owned by Fred Smith in Enid, Oklahoma

c A cabinetmaker purchases a dozen wood screws from the local hardware store

d An electric utility purchases coal from an underground mine

(a) Vertical integration; (b) contract; (c) spot exchange; (d) spot exchange or contract

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AACSB: Analytic

Blooms: Analyze

142

Which of the following transactions are likely to result in relationship-specific exchange?

a Purchasing gasoline for the company car

b Hiring an employee to operate a machine that only your company uses

c Buying napkins for the company snack bar

d Purchasing coal for the factory furnace

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Explain how each of the following affects the optimal method of acquiring an input

a A complex contracting environment

b A specialized investment

c Opportunism

d Bargaining costs

e The costs of bureaucracy

f Gains from specialization

a Makes contracts a less attractive form of input acquisition

b Makes spot exchange problematic, due to opportunism

c Leads to more detailed contracts or vertical integration

d Leads to longer contracts, or in extreme instances, vertical integration

e Reduces the gains to vertical integration and lead firms to use contracts or spot exchange

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I would use a contract, since this would decrease the problems of opportunism while still allowing for specialization in production

AACSB: Analytic

Blooms: Evaluate

b Football players are usually compensated by a fixed payment, along with incentives tied to performance for reasons similar to the insurance agent example

c Authors typically receive royalties, which are revenue-sharing plans whereby the author receives a fraction of the revenues generated by the book This compensation scheme provides the author an incentive to write a high-quality book in order to generate lots of sales for the firm, and thus lots of royalty income for the author

d A CEO of a major corporation is usually compensated by a fixed payment plus a variable bonus positively related to the amount of profits the corporation made Without the variable part of the payment, the CEO will not put forth as much effort as desired by the principal

e Waiters and waitresses are usually paid a small fixed payment by restaurants The majority

of their pay is derived from tips, since customers can monitor their servers while the

restaurant manager cannot

Topic: The Manager-Worker Principal-Agent Problem

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