Deck 6: Market Failures and Incentive Issues Inside the Firm

Question 1

A piecework wage compensation may be used if productivity

A)can be related to the supply chain.
B)is easy to measure.
C)is difficult to observe.
D)is backloaded.

Answer 1

is easy to measure.

Question 2

When employees are paid more than their worth when they are hired and less than their worth near retirement

A)compensation is forward loaded.
B)compensation is backloaded.
C)compensation is fair.
D)compensation is independent of productivity.

Answer 2

compensation is backloaded.

Question 3

Backloaded compensation encourages

A)employee turnover.
B)employee rollover.
C)principals to be agents.
D)employees to stay with the firm.

Answer 3

employees to stay with the firm.

Question 4

Being paid a wage more than your opportunity costs is an example of

A)economic profit.
B)normal profit.
C)an accounting cost.
D)an efficiency wage.

Question 5

Businesses often center production activities around

A)agents.
B)teams.
C)principals.
D)principals and agents.

Question 6

Public goods are goods that have

A)only a few low income consumers.
B)clear property right.
C)nonexcludability and nonrivalrous.
D)features that cannot be addressed by creating property rights.

Question 7

A wage profile rises because

A)employees become more productive over time.
B)employees become less productive over time.
C)managers are better able to monitor employees.
D)increases in the minimum wages push up other wages.

Question 8

A problem associated with the principal-agent relationship is

A)imperfect information.
B)perfect information.
C)the low costs of monitoring behavior.
D)none of these choices.

Question 9

A problem with teams is that individuals

A)are too individualistic to work with others.
B)prefer piecework pay schemes.
C)tend to free ride.
D)none of these choices.

Question 10

By being responsible for their actions

A)moral hazard becomes asymmetric information.
B)employees are being given a property right.
C)employees find it easier to free ride on the performance of others.
D)the stock market is selling the claims of agents.

Question 11

"People who have dental insurance don't floss often enough." This is an example of

A)asymmetric information.
B)bad parenting.
C)moral hazard.
D)risk adverse behavior

Question 12

Lincoln Electric paid employees on the basis of

A)deferred compensation.
B)backloaded wages.
C)a piece rate.
D)forward loaded wages.

Question 13

If a firm invests a lot in new employees, it is likely to

A)forward load compensation.
B)pay all the costs of the new training.
C)backload compensation.
D)none of these choices.

Question 14

A flat wage profile refers to

A)wage compression.
B)backloaded compensation.
C)an efficiency wage.
D)deferred compensation.

Question 15

Moral hazard is associated with

A)imperfect information.
B)perfect information.
C)the low costs of monitoring behavior.
D)all of these choices.

Question 16

To avoid wage compression,

A)employees probably need to change companies.
B)employees need to speak to their supervisors.
C)employees need to sign a deferred compensation contract.
D)managers need to pay above the minimum wage.

Question 17

A difference between the efficiency wage and the opportunity cost of labor is largely determined by

A)the number of managers.
B)the costs of monitoring employees.
C)the use of computers.
D)none of these choices.

Question 18

Goods that cannot be consumed without excluding other consumers are

A)public goods.
B)free.
C)are not scarce.
D)all of these choices.

Question 19

Economists would largely motivate employees by appealing to their

A)compensation.
B)need for time off.
C)intrinsic motivation.
D)none of these choices.

Question 20

Subjective evaluations

A)lend themselves to easy measurement.
B)are objective in nature.
C)are directly measured by productivity.
D)are based on opinion.

Question 21

If I am paid a wage below my opportunity cost, I am being paid an efficiency wage.

Question 22

Moral hazard arises when principals find it costly to monitor agents.

Question 23

Often managers require a payment due to their risk aversion.This payment is called

A)a golden parachute.
B)greenmail.
C)a poison pill.
D)rollover compensation

Question 24

Piecework compensation plans are useful when productivity is difficult to measure.

Question 25

Principals need to monitor agents.

Question 26

Free riding can be found in team structures.

Question 27

If initially an individuals' compensation is less than their productivity but the reverse is true, the individual

A)will free-ride late in their career.
B)has an incentive to leave the firm.
C)has an incentive to stay with the firm.
D)none of these choices.

Question 28

The board of directors and the CEO

A)do not have a principal/agent relationship.
B)are agent and principal, respectively.
C)are principal and agent, respectively.
D)are one in the same for small corporations.

Question 29

If older employees are being paid less than their value to the firm, their compensation is being backloaded.

Question 30

Agents hire principals.

Question 31

Risk-sharing forms of compensation are beneficial if employee are

A)risk preferring.
B)risk neutral.
C)risk averse.
D)prefer more to less.

Question 32

A common way used to align the interests of managers with the interests of equity holders is

A)piecework pay.
B)stock options.
C)forwarded loaded pay schemes.
D)insurance.

Question 33

The income of managers is often ____ diversified compared to the income of stockholders.

A)more easily
B)equally easily
C)less easily
D)smaller

Question 34

Lincoln Electric used backloaded compensation.

Question 35

Ways to address free riding include

A)profit-sharing.
B)subjective evaluations.
C)improved monitoring.
D)all of these choices.

Question 36

After people buy insurance, they are more likely to build a beach house out of wood framing rather than concrete block.This is an example of

A)risk aversion.
B)moral hazard.
C)risk neutrality.
D)free riding in teams.

Question 37

If job promotion is viewed as a contest, then

A)tournament theory can be used to explain the use of poison pills.
B)tournament theory can be used to explain the level of executive compensation.
C)tournament theory can be used to explain the use of greenmail.
D)tournament theory can be used to explain the use of golden parachutes.

Question 38

Backloaded compensation makes the wage profile increase at a decreasing rate.

Question 39

If a wage profile is relatively flat, wage compression may be present.

Question 40

Free riding is a problem

A)if an individual's contribution to a team is not easily measured.
B)if an individual's contribution is to a team is easily measured.
C)when monitoring is costless.
D)when team members are altruistic.

Question 41

Some people argue that limiting a CEO's pay may be a way to create good incentives.

Question 42

Individuals cannot be excluded from consuming a public good.

Question 43

Tournaments are used to identify the most productive person or the best player.

Question 44

If team members are able to evaluate other team members, then free riding can be minimized.

Question 45

Free-riding is linked to an absence of monitoring behavior.