Deck 6: The Organization of the Firm

Question 1

Spot exchange can be inefficient in the presence of:

A) opportunism.
B) a complex contracting environment.
C) spot checks.
D) None of the statements is correct.

Answer 1

A

Question 2

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

A) spot markets.
B) vertical integration.
C) short-term agency agreements.
D) long-term contracts.

Answer 2

B

Question 3

Which of the following is NOT a means of avoiding opportunism?

A) Contracts
B) Spot exchange
C) Vertical integration
D) Long-term contracts

Answer 3

B

Question 4

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
B) Profit-sharing plans in large companies
C) Commission pay schedules for salesmen
D) Straight hourly wages for dock workers

Question 5

An agent hired by the owner of productive resources to control the production process is:

A) a laborer.
B) a self-proprietor.
C) an assembly worker.
D) a firm manager.

Question 6

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

A) Flat salary with additional pay based on profits of the firm
B) Pay schedule based solely on profits earned by the firm
C) Flat salary regardless of firm profits
D) None of the statements is correct.

Question 7

A firm might choose to produce its own inputs if:

A) specialized investment is not important.
B) long-term contracts are costly to write.
C) the exchange environment is not complex.
D) spot markets for the input exist.

Question 8

The most likely effect of reducing performance-based rewards for the CEOs of corporations would be:

A) an increase in profits.
B) a drop in revenues.
C) a drop in profits.
D) an increase in the value of the corporation.

Question 9

A person who monitors the production process and evaluates the productivity of workers is:

A) a manager.
B) an employee.
C) a shareholder.
D) a self-proprietor.

Question 10

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

A) opportunism is not a problem.
B) suppliers engage in hold-up.
C) profit sharing is used to compensate managers.
D) the supplier needs specialized investment to produce the input.

Question 11

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

A) the losses of specialization.
B) increased transaction costs.
C) the principal-agent problem.
D) synergies of team production.

Question 12

The disadvantage of vertical integration is that:

A) relationship-specific exchange may cause hold-up.
B) long-term contracts may be inflexible.
C) the principal-agent problem causes shirking.
D) firms no longer specialize in what they do best.

Question 13

A negative side of long-term contracts is:

A) high transaction costs.
B) a loss of flexibility.
C) the continual need to renegotiate the contract.
D) None of the statements is correct.

Question 14

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

A) Commission plans for salesmen
B) Flat salary for a plant manager
C) Bonuses for managers that increase as profits increase
D) None of the statements is correct.

Question 15

A relationship-specific exchange occurs when:

A) a partnership is dissolved.
B) specialized investments are important.
C) a partnership is initiated.
D) shareholders receive dividends.

Question 16

Shirking can take the form of:

A) long lunch hours.
B) sleeping at work.
C) leaving work early.
D) All of the statements associated with this question are correct.

Question 17

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

A) company is financially secure.
B) manager will work hard.
C) manager will maintain employee morale.
D) company will have positive economic profits.

Question 18

Long-term contracts become longer:

A) when specialized investment becomes more important.
B) when the exchange environment is more complex.
C) when spot markets work well.
D) when marginal costs are declining.

Question 19

In the absence of worker incentives:

A) everyone always gives maximum effort.
B) there is a natural tendency for workers to not give their maximum effort.
C) managers have little or no control.
D) None of the statements is correct.

Question 20

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?

A) $812,431
B) $43,400
C) $559,432
D) $512,000

Question 21

Which type of compensation mechanism works by threats?

A) Piece rate
B) Spot check
C) Revenue sharing
D) Profit sharing

Question 22

High transaction costs:

A) occur when specialized investment is not important.
B) make spot exchange an efficient way to obtain inputs.
C) may be a result of buyer opportunism.
D) may be the result of downward-sloping demand.

Question 23

An increase in the likelihood of a dismissal:

A) raises productivity at an increasing rate.
B) raises productivity at a decreasing rate.
C) decreases productivity at a decreasing rate.
D) decreases productivity at an increasing rate.

Question 24

Spot checks:

A) measure presence only.
B) monitor the effort of workers precisely.
C) are the same as spot markets.
D) must be frequent enough to induce workers not to risk getting caught shirking.

Question 25

Which type of compensation method works by performance bonus?

A) Profit sharing
B) Revenue sharing
C) Piece rate
D) All of the statements associated with this question are correct.

Question 26

The most commonly used negative incentive used by firms is:

A) temporary layoffs.
B) dismissal.
C) unpaid suspensions.
D) verbal reprimands.

Question 27

Transaction costs refer to:

A) fixed costs of capital.
B) variable costs of labor.
C) costs of exchange unrelated to production costs.
D) economies of scale.

Question 28

Spot checks work because of:

A) the promise of a reward.
B) a promise of performance-based pay.
C) a potential penalty for shirking.
D) monitoring on a regular basis.

Question 29

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

A) waiters and waitresses.
B) car salesman.
C) insurance agents.
D) All of the statements associated with this question are correct.

Question 30

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

A) random in nature.
B) performed at regular intervals.
C) partaken twice daily.
D) rarely if ever done.

Question 31

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

A) quality control mechanisms.
B) time clocks.
C) spot checks.
D) profit-sharing plans.

Question 32

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

A) Paying typists a fixed amount per page
B) Paying sewing machine operators a flat amount per shirt sewn
C) Paying a carpenter to install a new back porch
D) Paying an assembly line worker per bolt put into car bodies

Question 33

The LEAST risky payment plan from the viewpoint of the worker is:

A) piece rate.
B) profit sharing.
C) revenue sharing.
D) hourly wage.

Question 34

When a manager enters the workplace from time to time to monitor workers, he is using:

A) a profit-sharing plan.
B) spot checks.
C) a revenue-sharing plan.
D) a piece-rate payment plan.

Question 35

A potential problem with piece-rate plans is that:

A) workers will produce a large quantity.
B) workers have no incentive to work hard.
C) it is difficult for managers to control.
D) workers may stress quantity instead of quality.

Question 36

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
C) 7.8 percent
D) 5.1 percent

Question 37

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

A) does not induce hard or better work.
B) can be costly if revenues are low.
C) gives no incentive for workers to minimize costs.
D) can be difficult to manage from an accounting standpoint.

Question 38

A manager who tries to enhance worker effort by tying workers' compensation to the profitability of the firm is using:

A) spot checks.
B) revenue sharing.
C) profit sharing.
D) piece rates.

Question 39

A payment plan that induces better worker effort by linking compensation to revenues of the firm is known as:

A) revenue sharing.
B) profit sharing.
C) piece rate sharing.
D) spot checking.

Question 40

An incentive for managers to maximize profits is:

A) reputation.
B) performance bonuses.
C) takeovers.
D) All of the statements associated with this question are correct.

Question 41

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

A) Bethlehem Steel purchases U.S. Steel.
B) IBM purchases a California computer chip company.
C) AT&T purchases MCI.
D) GM purchases Ford.

Question 42

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.
C) do not overlap with those of the principal.
D) overlap with those of the principal.

Question 43

A firm chooses the institution to purchase inputs:

A) which minimizes the transactions costs of obtaining inputs.
B) in order to create more divisions.
C) which minimizes worker shirking.
D) to implement profit sharing.

Question 44

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

A) any other principal.
B) the agents.
C) the firms.
D) the consumers.

Question 45

If a firm manager has a base salary of $50,000 and also gets 2 percent of all profits, how much will his/her income be if revenues are $8,000,000 and profits are $2,000,000?

A) $250,000
B) $210,000
C) $90,000
D) $150,000

Question 46

When the owner runs the business:

A) he does not bear the full cost of a bad decision.
B) there is not a principal-agent problem.
C) he does not receive the full benefit nor the full cost of any decision.
D) he has only limited liability for the actions of the business.

Question 47

Which of the following occurs as firm size grows?

A) A decrease in the number of managers needed.
B) A decrease in transaction costs.
C) A loss of opportunity cost.
D) Administrative and bureaucratic costs rise at an increasing rate.

Question 48

If a manager wishes to produce a large level of output, which compensation mechanism is most effective?

A) Spot check
B) Piece rate
C) Revenue sharing
D) Profit sharing

Question 49

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

A) Spot exchange
B) Vertical integration
C) Profit-sharing
D) Long-term contracts

Question 50

Principal-agent problems do NOT arise between:

A) stockholders and managers.
B) managers and workers.
C) stockholders and workers.
D) workers and consumers.

Question 51

A long-term contract:

A) occurs when a firm produces its own inputs.
B) is most likely in complex exchange environments.
C) exists when a firm is legally bound to purchase inputs from a particular supplier.
D) is shorter when specialized investments are important.

Question 52

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

A) contracted market price.
B) prevailing market price.
C) predetermined market price.
D) post-determined market price.

Question 53

Long-term contracts are NOT efficient if:

A) a firm engages in relationship-specific exchange.
B) specialized investments are unimportant.
C) the contractual environment is simple.
D) managers shirk.

Question 54

If a manager is not the owner, the manager:

A) receives the full benefit of good decisions.
B) bears the full cost of bad decisions.
C) does not receive the full benefit nor the full cost of his or her decisions.
D) None of the statements is correct.

Question 55

The agent is an individual:

A) who acts independently of the principal.
B) who can direct the principal to achieve goals.
C) hired by the principal to achieve goals.
D) hired by the principal to consult with him.

Question 56

If a firm manager has a base salary of $100,000 and also receives 5 percent of all profits, what percentage of his/her final income will be from a profit-sharing plan when profit equals $1,500,000?

A) 51 percent
B) 27 percent
C) 43 percent
D) 48 percent

Question 57

Specialized investments:

A) result in relationship-specific exchange.
B) make spot exchange efficient.
C) cause managers to shirk.
D) are equally valuable in any productive use.

Question 58

Vertical integration:

A) occurs when a firm purchases its inputs in a market.
B) is attractive when relationship-specific exchange is unimportant.
C) occurs when a firm produces its own inputs.
D) is a spot exchange phenomenon.

Question 59

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

A) on the production function.
B) above the production function.
C) below the production function.
D) above the isoquant curve.

Question 60

Hold-up:

A) is a hazard associated with relationship-specific exchange.
B) mitigates worker shirking.
C) makes spot exchange efficient.
D) solves the principal-agent problem.

Question 61

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

A) shirk all day.
B) not shirk all day.
C) optimize his choice between income and leisure.
D) do the same thing as under a fixed salary scheme.

Question 62

The specificity of the asset (or investment) leads to the possibility of:

A) collusion.
B) prisoner's dilemma.
C) opportunism.
D) None of the statements is correct.

Question 63

It would be undesirable to reduce the executive's compensation if her earnings are due largely to:

A) a flat fee.
B) performance.
C) the owner's demand.
D) the employee's demand.

Question 64

Franchising mitigates:

A) opportunism.
B) relationship-specific investment.
C) the hold-up problem.
D) the principal-agent problem.

Question 65

By making managerial compensation depend on the performance of the firm's profits, the firm owner's profits:

A) rise.
B) fall.
C) remain constant.
D) initially fall, then rise.

Question 66

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

A) Incentive contracts
B) Performance bonuses
C) Flat fees
D) Reputation

Question 67

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

A) have incentives to behave as principals.
B) have incentives to behave opportunistically.
C) take the risk of price fluctuations.
D) do not take advantage of the economies of scope.

Question 68

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

A) a decrease in his fixed salary.
B) a decrease in the profit of the firm.
C) a decrease in the sales of the firm.
D) an increase in the likelihood of being replaced.

Question 69

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

A) Sales sharing
B) Piece rates
C) Fixed hourly wages
D) Spot checks

Question 70

Given that the income of franchise restaurant managers is directly tied to profits and the income of the manager of the company-owned restaurant is paid a flat fee, we might expect profits to be:

A) higher in company-owned restaurants.
B) lower in company-owned restaurants.
C) equal in both types of restaurants.
D) None of the statements are correct.

Question 71

If we reduce performance-based rewards to CEOs, the profits of firms will:

A) rise.
B) fall.
C) remain constant.
D) None of the answers are correct.

Question 72

Relationship-specific investments include:

A) site specificity.
B) dedicated assets.
C) human capital.
D) All of the statements associated with this question are correct.

Question 73

One way of alleviating opportunism is:

A) spot exchange.
B) dedicated assets.
C) vertical integration.
D) contracts in complex contracting environments.

Question 74

Long-term contracts are LESS likely when:

A) specialized investments are important.
B) hold-up is likely.
C) the exchange environment is complex.
D) workers are paid based on piece rates.

Question 75

Spot exchange typically involves:

A) no transaction costs.
B) some transaction costs.
C) extremely high transaction costs.
D) long-term contracts.

Question 76

Relationship-specific exchange:

A) is a consequence of profit sharing.
B) makes firms use spot markets.
C) occurs because of specialized investments.
D) reduces worker shirking.

Question 77

A firm manager is an agent hired by the:

A) owner to control the production process.
B) workers to control the production process.
C) workers to consult with the owner.
D) owner to oversee the workers.

Question 78

The principal-agent problem happens because the owner cannot:

A) control the production process.
B) spend time at the physical plant site.
C) monitor the efforts of the manager.
D) evaluate the efforts of the manager.

Question 79

Long-term contracts:

A) increase transaction costs and increase opportunism.
B) increase transaction costs.
C) can reduce opportunistic behavior.
D) reduce transaction costs and increase flexibility.

Question 80

Which of the following institutions may result in hold-up?

A) Vertical integration
B) Piece rates
C) Long-term contracts
D) Spot markets