Question 1

What is an agency relationship? What are agency problems?

Accepted Answer

An agency relationship consists of an agreement under which one party, the principal engages another party, the agent, to perform some service on the principal's behalf. Agency problems refer to the difficulty in aligning the incentives of the principal and agent. As an example, agents may have an incentive to cheat and the principal may not have a foolproof way of controlling this.

Question 2

What are some ways of reducing adverse selection in the insurance market?

Accepted Answer

Self-selection and signaling may be two ways of reducing adverse selection. Suppose you prefer a low-priced insurance contract with a high deductible, whereas I choose a high-priced contract with $0 deductible. Our self-selection reveals that you are relatively healthier than I am. Similarly, you can also signal to the company through your exercise program and frequent check ups that you are healthier. Some of these could be designed by the company to avoid adverse selection.

Question 3

While many managers and lawyers might claim that implicit contracts "aren't worth the paper that they are not written on," most understandings between companies and their customers and their employees are implicit. Why?

Accepted Answer

Repeated interactions and reputations can create powerful incentives for cooperation. The threat of future lost business and a bad reputation often leads people to abide by implicit contracts. In dealings with employees, breaches of implicit contracts could lead to higher employee turnover which would be costly to the firm.

Question 4

While CEO of General Electric, Jack Welch was a very successful corporate manager. He also loaded up his retirement program with numerous unusual benefits such as rented apartments, free airplanes, and numerous club memberships. The owners (stockholders) were generally unaware of these benefits. This conflict between owners and managers involved:

Accepted Answer

A)  choice of effort of Mr. Welch while he was CEO. 
B)  perquisite taking on the part of Mr. Welch. 
C)  differential risk exposure between Mr. Welch and the typical stockholder. 
D)  overinvestment in company offices by Mr. Welch. 
A)  choice of effort of Mr. Welch while he was CEO. 
B)  perquisite taking on the part of Mr. Welch. 
C)  differential risk exposure between Mr. Welch and the typical stockholder. 
D)  overinvestment in company offices by Mr. Welch.

Question 5

You want to hire a law firm to represent you from which you derive benefit. The law firm incurs costs from providing this service. As long as marginal benefits are greater than marginal costs:

Accepted Answer

A)  Value is minimized. 
B)  Value is not maximized because too much services is provided. 
C)  Value is not maximized because services are not sufficient. 
D)  Value is maximized. 
A)  Value is minimized. 
B)  Value is not maximized because too much services is provided. 
C)  Value is not maximized because services are not sufficient. 
D)  Value is maximized.

Question 6

Designing efficient contracts are costly when:

Accepted Answer

A)  everyone wants to cheat anyway. 
B)  there is complete information. 
C)  there is asymmetric information. 
D)  there is a free-rider problem. 
A)  everyone wants to cheat anyway. 
B)  there is complete information. 
C)  there is asymmetric information. 
D)  there is a free-rider problem.

Question 7

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:

Accepted Answer

A)  cost containment. 
B)  company reputation. 
C)  the need for reinforcement. 
D)  the asymmetric information Smith holds on quality. 
A)  cost containment. 
B)  company reputation. 
C)  the need for reinforcement. 
D)  the asymmetric information Smith holds on quality.

Question 8

Using piece rates for employees in an assembly line usually increases ________, but it may reduce ________.

Accepted Answer

A)  output; quality 
B)  costs; revenues 
C)  quality; output 
D)  revenues; costs 
A)  output; quality 
B)  costs; revenues 
C)  quality; output 
D)  revenues; costs

Question 9

An informal understanding about the quality of product components is a key to the relationship between most companies and their suppliers. This a good example of:

Accepted Answer

A)  an implicit contract. 
B)  an explicit contract. 
C)  a principal/agent conflict resolution. 
D)  an adverse selection problem. 
A)  an implicit contract. 
B)  an explicit contract. 
C)  a principal/agent conflict resolution. 
D)  an adverse selection problem.

Question 10

Jim Range owns a Best Ice Cream store, one of 1,000 franchises across the country. Jim doesn't like to work evenings, so he hires Mary Jo Smith to work the store in the evening for $6.50 per hour. Mary Jo's friends come by each evening and she gives them free cones. Is this an adverse selection problem or an incentive problem? What is the solution?

Accepted Answer

This is an incentive problem. Jim Range

Question 11

Kaneshi Hartfield is a sales representative with Plain Truth Advertising. She is an excellent sales representative, but corporate management feels that she is too independent. But they are afraid to act, since Kaneshi maintains her own list of key contacts. This is an example of:

Accepted Answer

A)  asymmetric information problems. 
B)  different time horizons of the sales representative and management. 
C)  the free rider problem. 
D)  the failure of bargaining. 
A)  asymmetric information problems. 
B)  different time horizons of the sales representative and management. 
C)  the free rider problem. 
D)  the failure of bargaining.

Question 12

Mary Jo Smith is willing to work for $3,200 per month. She asks the HR manager at Plain Truth Advertising for $4,000 per month. While he was willing to pay $3,700 per month, he rejects her application and begins to search for a new employee again. This is an example of:

Accepted Answer

A)  adverse selection. 
B)  value maximization. 
C)  bargaining failure. 
D)  agency incentive problems. 
A)  adverse selection. 
B)  value maximization. 
C)  bargaining failure. 
D)  agency incentive problems.

Question 13

Which one of the following is a big problem in large groups?

Accepted Answer

A)  Useless group leader. 
B)  Adverse selection problem. 
C)  Free-rider problem. 
D)  Buyer-supplier conflicts. 
A)  Useless group leader. 
B)  Adverse selection problem. 
C)  Free-rider problem. 
D)  Buyer-supplier conflicts.

Question 14

Adverse selection in bargaining comes from:

Accepted Answer

A)  lying to one party or another. 
B)  principals in the bargaining process. 
C)  agents in the bargaining process. 
D)  asymmetric information held by the principal or agent. 
A)  lying to one party or another. 
B)  principals in the bargaining process. 
C)  agents in the bargaining process. 
D)  asymmetric information held by the principal or agent.

Question 15

What is Adverse Selection? Give an example to illustrate this problem.

Accepted Answer

Adverse selection refers to the tendency

Question 16

Markets use prices to allocate resources; firms use:

Accepted Answer

A)  cost-price ratios. 
B)  managers. 
C)  the Board of Directors. 
D)  random decisions. 
A)  cost-price ratios. 
B)  managers. 
C)  the Board of Directors. 
D)  random decisions.

Question 17

In most models of managerial conflict, the owner is the ________ and the manager is the __________.

Accepted Answer

A)  wage earner; stockholder 
B)  employee; director 
C)  principal; agent 
D)  resource; resource owner 
A)  wage earner; stockholder 
B)  employee; director 
C)  principal; agent 
D)  resource; resource owner

Question 18

Billy Mac Tailor drives an eighteen-wheeler CG Carriers. He always stops at All Bright truck stops to by diesel fuel. He is a preferred customer and gets a free meal and shower worth $10.00. But All Bright charges $12.00 more for a fill up than most competitors. Which of the following is true?

Accepted Answer

A)  CG Carriers gets a benefit of $22.00 because Tailor is a preferred customer. 
B)  CG Carriers has a wealth reduction of $2.00 even though they do not know about Tailor's actions. 
C)  There is a wealth transfer to Billy Mac Tailor and CG Carriers has a wealth reduction of $12.00 . 
D)  Billy Mac Tailor increases his income by $10.00 and CG Carriers also benefits. 
A)  CG Carriers gets a benefit of $22.00 because Tailor is a preferred customer. 
B)  CG Carriers has a wealth reduction of $2.00 even though they do not know about Tailor's actions. 
C)  There is a wealth transfer to Billy Mac Tailor and CG Carriers has a wealth reduction of $12.00 . 
D)  Billy Mac Tailor increases his income by $10.00 and CG Carriers also benefits.

Question 19

A pilot for a private jet stops for refueling in Omaha, Nebraska. Topper Fuels offers him a case of French wine to refuel with them (a total retail value of $324 to the pilot). For refueling, inspections, and minor repairs, Topper charges $2,700, $400 more than the least expensive fuel company. What has happened to the company that owns the private jet?

Accepted Answer

This is an example of an incentive confl

Question 20

Always Round Tire hires Plain Truth Advertising to write copy for its newspaper advertisements. Always Round has a demand for advertising of MB = 400 -2S where S is the number of hours that Plain Truth delivers. If Plain Truth has a fixed supply cost: MC = $150 per hour, what are the number of hours that Always Round purchases from Plain Truth under the assumption of costless monitoring? How much is the contract worth to Always Round? If Always Round offers half of the surplus to Plain Truth as an incentive, how much is Plain Truth paid for the job?

Accepted Answer

Setting marginal benefit equal to margin

What is an agency relationship? What are agency problems?

What are some ways of reducing adverse selection in the insurance market?

While many managers and lawyers might claim that implicit contracts "aren't worth the paper that they are not written on," most understandings between companies and their customers and their employees are implicit. Why?

You want to hire a law firm to represent you from which you derive benefit. The law firm incurs costs from providing this service. As long as marginal benefits are greater than marginal costs:

Designing efficient contracts are costly when:

Using piece rates for employees in an assembly line usually increases , but it may reduce .

An informal understanding about the quality of product components is a key to the relationship between most companies and their suppliers. This a good example of:

Kaneshi Hartfield is a sales representative with Plain Truth Advertising. She is an excellent sales representative, but corporate management feels that she is too independent. But they are afraid to act, since Kaneshi maintains her own list of key contacts. This is an example of:

Mary Jo Smith is willing to work for $3,200 per month. She asks the HR manager at Plain Truth Advertising for $4,000 per month. While he was willing to pay $3,700 per month, he rejects her application and begins to search for a new employee again. This is an example of:

Which one of the following is a big problem in large groups?

Adverse selection in bargaining comes from:

What is Adverse Selection? Give an example to illustrate this problem.

Markets use prices to allocate resources; firms use:

In most models of managerial conflict, the owner is the and the manager is the __.

Billy Mac Tailor drives an eighteen-wheeler CG Carriers. He always stops at All Bright truck stops to by diesel fuel. He is a preferred customer and gets a free meal and shower worth $10.00. But All Bright charges $12.00 more for a fill up than most competitors. Which of the following is true?

Introduction

Economists View of Behavior

Markets, Organizations, and the Role of Knowledge

Demand

Production and Cost

Market Structure

Pricing With Market Power

Economics of Strategy: Creating and Capturing Value

Economics of Strategy: Game Theory

Organizational Architecture

Decision Rights: The Level of Empowerment

Decision Rights: Bundling Tasks Into Jobs and Subunits

Attracting and Retaining Qualified Employees

Incentive Compensation

Individual Performance Evaluation

Divisional Performance Evaluation

Corporate Governance

Vertical Integration and Outsourcing

Leadership: Motivating Change Within Organizations

Understanding the Business Environment: The Economics of Regulation

Ethics and Organizational Architecture

Organizational Architecture and the Process of Management Innovation

Filters

Exam 10: Incentive Conflicts and Contracts

What is an agency relationship? What are agency problems?

What are some ways of reducing adverse selection in the insurance market?

While many managers and lawyers might claim that implicit contracts "aren't worth the paper that they are not written on," most understandings between companies and their customers and their employees are implicit. Why?

You want to hire a law firm to represent you from which you derive benefit. The law firm incurs costs from providing this service. As long as marginal benefits are greater than marginal costs:

Designing efficient contracts are costly when:

Using piece rates for employees in an assembly line usually increases ________, but it may reduce ________.

An informal understanding about the quality of product components is a key to the relationship between most companies and their suppliers. This a good example of:

Kaneshi Hartfield is a sales representative with Plain Truth Advertising. She is an excellent sales representative, but corporate management feels that she is too independent. But they are afraid to act, since Kaneshi maintains her own list of key contacts. This is an example of:

Mary Jo Smith is willing to work for $3,200 per month. She asks the HR manager at Plain Truth Advertising for $4,000 per month. While he was willing to pay $3,700 per month, he rejects her application and begins to search for a new employee again. This is an example of:

Which one of the following is a big problem in large groups?

Adverse selection in bargaining comes from:

What is Adverse Selection? Give an example to illustrate this problem.

Markets use prices to allocate resources; firms use:

In most models of managerial conflict, the owner is the ________ and the manager is the __________.

Billy Mac Tailor drives an eighteen-wheeler CG Carriers. He always stops at All Bright truck stops to by diesel fuel. He is a preferred customer and gets a free meal and shower worth $10.00. But All Bright charges $12.00 more for a fill up than most competitors. Which of the following is true?

Introduction

Economists View of Behavior

Markets, Organizations, and the Role of Knowledge

Demand

Production and Cost

Market Structure

Pricing With Market Power

Economics of Strategy: Creating and Capturing Value

Economics of Strategy: Game Theory

Organizational Architecture

Decision Rights: The Level of Empowerment

Decision Rights: Bundling Tasks Into Jobs and Subunits

Attracting and Retaining Qualified Employees

Incentive Compensation

Individual Performance Evaluation

Divisional Performance Evaluation

Corporate Governance

Vertical Integration and Outsourcing

Leadership: Motivating Change Within Organizations

Understanding the Business Environment: The Economics of Regulation

Ethics and Organizational Architecture

Organizational Architecture and the Process of Management Innovation

Filters

Using piece rates for employees in an assembly line usually increases , but it may reduce .

In most models of managerial conflict, the owner is the and the manager is the __.