Question 1

Determine whether the following transactions involve spot exchange,contracts,or vertical integration.
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.

Accepted Answer

(a)Vertical integrat...

Question 2

Suppose a firm manager has a base salary of $75,000 and earns 1.5 percent of all profits.Determine the manager's income,if revenues are $10,000,000 and profits are $5,000,000.

Accepted Answer

A)   $75,000
B)   $150,000
C)   $225,000
D)   $300,000E) A) and C)
F) None of the above

Question 3

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

Accepted Answer

A)   lower in franchise restaurants.
B)   higher in franchise restaurants.
C)   equal in both types of restaurants.
D)   Profit comparisons cannot be made based on the given information.E) B) and C)
F) A) and D)

Question 4

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

Accepted Answer

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.E) None of the above
F) A) and D)

Question 5

An increase in the marginal benefit arising from a specialized investment will cause the optimal contract length to:

Accepted Answer

A)   increase.
B)   decrease.
C)   remain constant.
D)   either increase or decrease.E) All of the above
F) None of the above

Question 6

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

Accepted Answer

A)   Spot check
B)   Piece rate
C)   Revenue sharing
D)   Profit sharingE) A) and D)
F) None of the above

Question 7

Transaction costs refer to:

Accepted Answer

A)   fixed costs of capital.
B)   variable costs of labor.
C)   costs of exchange unrelated to production costs.
D)   economies of scale.E) A) and D)
F) All of the above

Question 8

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

Accepted Answer

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

Question 9

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

Accepted Answer

A)   Revenue-sharing contracts
B)   Performance bonuses
C)   Threat of takeovers
D)   Flat feesE) None of the above
F) B) and D)

Question 10

Which of the following is NOT an implication of specialized investments that lead to increased transaction costs?

Accepted Answer

A)   Costly bargaining
B)   Opportunism and the hold-up problem
C)   Underinvestment in specialized investments
D)   Incentive contractsE) A) and B)
F) None of the above

Question 11

The presence of substantial specialized investment relative to contracting costs suggests that the optimal input procurement method is:

Accepted Answer

A)   spot exchange.
B)   vertical integration.
C)   contract.
D)   vertical integration or contract.E) All of the above
F) None of the above

Question 12

Suppose a principal knew with certainty the level of profits that would result if an agent put forth maximum effort.
a.Would there be a principal-agent problem?
b.Devise two incentive contracts that would induce the manager to put forth maximum effort in this instance.

Accepted Answer

a.There would not be a principal-agent p...

Question 13

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

Accepted Answer

a.Makes contracts a less attractive form...

Question 14

A decrease in the marginal benefit arising from a specialized investment will cause the optimal contract length to:

Accepted Answer

A)   increase.
B)   decrease.
C)   remain constant.
D)   either increase or decrease.E) A) and C)
F) None of the above

Question 15

One way of alleviating opportunism is:

Accepted Answer

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

Question 16

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

Accepted Answer

A)   Contracts
B)   Spot exchange
C)   Vertical integration
D)   Long-term contractsE) A) and D)
F) A) and C)

Question 17

Suppose a firm manager has a base salary of $175,000 and earns 0.5 percent of all profits.Determine the manager's income if revenues are $10,000,000 and profits are $5,000,000.

Accepted Answer

A)   $150,000
B)   $200,000
C)   $225,000
D)   $300,000E) A) and B)
F) A) and C)

Question 18

Which of the following is NOT a type of specialized investment?

Accepted Answer

A)   Site specificity
B)   Physical-asset specificity
C)   Human capital
D)   All of the statements associated with this question are types of specialized investments.E) A) and D)
F) None of the above

Question 19

Which type of compensation method does NOT involve a performance bonus?

Accepted Answer

A)   Profit sharing
B)   Revenue sharing
C)   Piece rate
D)   None of the answers are correct.E) A) and B)
F) A) and C)

Question 20

Which of the following occurs as firm size grows?

Accepted Answer

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.E) C) and D)
F) B) and C)

Exam 6: The Organization of the Firm

Suppose a principal knew with certainty the level of profits that would result if an agent put forth maximum effort. a.Would there be a principal-agent problem? b.Devise two incentive contracts that would induce the manager to put forth maximum effort in this instance.

Correct Answer
verified
a.There would not be a principal-agent p...
View Answer

Which of the following is NOT a type of specialized investment?

Correct Answer
verified

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

Correct Answer
verified

Transaction costs refer to:

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified
(a)Vertical integrat...
View Answer

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

Correct Answer
verified
a.Makes contracts a less attractive form...
View Answer

A decrease in the marginal benefit arising from a specialized investment will cause the optimal contract length to:

Correct Answer
verified

An increase in the marginal benefit arising from a specialized investment will cause the optimal contract length to:

Correct Answer
verified

Which of the following is NOT an implication of specialized investments that lead to increased transaction costs?

Correct Answer
verified

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

Correct Answer
verified

Which of the following occurs as firm size grows?

Correct Answer
verified

One way of alleviating opportunism is:

Correct Answer
verified

The presence of substantial specialized investment relative to contracting costs suggests that the optimal input procurement method is:

Correct Answer
verified

Suppose a firm manager has a base salary of $175,000 and earns 0.5 percent of all profits.Determine the manager's income if revenues are $10,000,000 and profits are $5,000,000.

Correct Answer
verified

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

Correct Answer
verified

Suppose a firm manager has a base salary of $75,000 and earns 1.5 percent of all profits.Determine the manager's income,if revenues are $10,000,000 and profits are $5,000,000.

Correct Answer
verified

Which type of compensation method does NOT involve a performance bonus?

Correct Answer
verified

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

Correct Answer
verified

Exam 6: The Organization of the Firm

Suppose a principal knew with certainty the level of profits that would result if an agent put forth maximum effort. a.Would there be a principal-agent problem? b.Devise two incentive contracts that would induce the manager to put forth maximum effort in this instance.

Correct Answerverifieda.There would not be a principal-agent p...View AnswerShow Answer

Which of the following is NOT a type of specialized investment?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Transaction costs refer to:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answerverified(a)Vertical integrat...View AnswerShow Answer

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

Correct Answerverifieda.Makes contracts a less attractive form...View AnswerShow Answer

A decrease in the marginal benefit arising from a specialized investment will cause the optimal contract length to:

Correct AnswerverifiedShow Answer

An increase in the marginal benefit arising from a specialized investment will cause the optimal contract length to:

Correct AnswerverifiedShow Answer

Which of the following is NOT an implication of specialized investments that lead to increased transaction costs?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following occurs as firm size grows?

Correct AnswerverifiedShow Answer

One way of alleviating opportunism is:

Correct AnswerverifiedShow Answer

The presence of substantial specialized investment relative to contracting costs suggests that the optimal input procurement method is:

Correct AnswerverifiedShow Answer

Suppose a firm manager has a base salary of $175,000 and earns 0.5 percent of all profits.Determine the manager's income if revenues are $10,000,000 and profits are $5,000,000.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose a firm manager has a base salary of $75,000 and earns 1.5 percent of all profits.Determine the manager's income,if revenues are $10,000,000 and profits are $5,000,000.

Correct AnswerverifiedShow Answer

Which type of compensation method does NOT involve a performance bonus?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
verified
a.There would not be a principal-agent p...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
(a)Vertical integrat...
View Answer

Correct Answer
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a.Makes contracts a less attractive form...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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