Deck 11: Pay and Productivity: Wage Determination within the Firm

Question 1

Most employment contracts are

A) legally enforceable.
B) implicit.
C) formal.
D) complete.

Answer 1

B

Question 2

The surplus due to specific training of employees is

A) received by the employees.
B) received by the employers.
C) used to increase employees' wages above their marginal product.
D) shared by the employees and the employers.

Answer 2

D

Question 3

Efficiency wages are

A) designed to increase profits through reduced turnover and increased morale.
B) thought to decrease unemployment.
C) not profit-maximizing for employers because they are paying more than the market wage.
D) the lowest wages at which a firm can hire workers.

Answer 3

A

Question 4

Which of the following types of pay is NOT linked to output?

A) commissions
B) profit sharing
C) hourly wages
D) piece-rate pay

Question 5

The workers who will prefer piece-rate pay will usually be

A) less present-oriented than average.
B) less motivated than average.
C) more productive than average.
D) more risk-averse than average.

Question 6

One problem with pay for performance is that

A) it provides incentives for workers to put forth effort.
B) workers are risk-averse.
C) supervision is very expensive.
D) workers are income maximizers.

Question 7

A promotion tournament is

A) a process to assure the most productive worker is paid his or her marginal product.
B) a process to help a corporation get rid of "deadwood."
C) a way to insure that all diligent workers get big rewards.
D) a process to motivate several workers to try and win one high-paying job.

Question 8

Opportunistic behavior is a tendency on the part of employees to

A) end up working less diligently than their stated intentions implied.
B) take the initiative to help advance the employer's objectives.
C) plan to mislead employers to attain a "cushy" job.
D) maximize income.

Question 9

Higher wages generally

A) decrease worker productivity due to the fact that workers have backward-bending labor supply curves.
B) decrease worker productivity due to shirking.
C) increase worker productivity due to moral hazard.
D) increase worker productivity by increasing the quality of the applicant pool.

Question 10

Fairness in regards to a worker's reference group is important in the labor market because

A) workers think it is unfair for employers to earn a profit.
B) workers care about their relative treatment.
C) employers must supervise most workers closely.
D) employers want to maximize profits.

Question 11

Which of the following assumptions are we making for the first time in this Chapter ?

A) Workers maximize utility.
B) Employers maximize profits.
C) The marginal product of labor of two workers may be different.
D) The productivity of two workers may differ in ways that are hard to measure.

Question 12

Free rider problems tend to be largest when

A) workers are paid by a piece-rate system.
B) workers are paid by group incentives.
C) workers are paid on commission.
D) firms are very small.

Question 13

Underpayment followed by overpayment is most likely to

A) decrease work incentives due to low wages in the first period.
B) require greater supervision.
C) attract present-oriented workers.
D) increase productivity of workers seeking to qualify for later overpayment.

Question 14

Workers who are paid on a piece-rate basis tend to

A) work quickly.
B) have a high regard for quality.
C) require close supervision.
D) work well as members of a team.

Question 15

Merit-pay plans which rate workers relative to their peers

A) are very popular among nonmanagerial employees.
B) generally cause workers to cooperate better.
C) can account for factors in the external environment that affect an individual's output.
D) work best when there is a bunching of ratings.

Question 16

Which of the following would NOT be a "signal" to an employer that a potential employee has a low discount rate?

A) The employee's possession of a college or graduate degree.
B) The employee's willingness to accept a low-paying job with a good pension plan.
C) The employee's desire for a relatively high salary and little chance of advancement.
D) The employee's willingness to attain large amounts of training.

Question 17

Pay for performance works LEAST well for an employee

A) who works as a counselor for other employees in a company.
B) who is closely supervised.
C) who maximizes utility.
D) whose value added is easily measured.

Question 18

Many employees prefer to be paid on the basis of

A) output, because it decreases variation of wages.
B) time, because it decreases variation of wages.
C) output, because it increases variation of wages.
D) time, because it increases variation of wages.

Question 19

A self-enforcing contract requires that

A) employees gain from opportunistic behavior.
B) one party receives the entire surplus.
C) both employees and employers lose by discontinuing their contract.
D) the surplus be divided equally.

Question 20

An employment contract is most likely to be successful when it

A) provides the proper incentives so as to be self-enforcing.
B) can be legally defensible.
C) can be specific about all tasks required of the employee.
D) includes legal penalties if either party abrogates the contract.

Question 21

A company has a merit pay plan based on the relative performance of workers teams.Each worker in a team gets the same wage as other team members,but those in more productive teams get higher wages.Which of the following would NOT explain why this incentive might be better than other methods for motivating workers to work harder?

A) If a worker works harder, it increases the productivity of other team members.
B) If a team works harder, it does not affect the productivity of other teams.
C) One worker can easily sabotage the productivity of other workers.
D) One team can easily sabotage the productivity of other teams.

Question 22

Suppose that monopsony behavior results from the increased monitoring costs at large firms.A higher minimum wage would ________ the marginal expense of hiring labor but only if the workers are ________ afraid of losing their jobs and thus need less supervision.

A) rise; more
B) raise; less
C) lower; more
D) lower; less

Question 23

In a competitive labor market,Firm X pays a higher wage than other firms.The only reason it pays a higher wage is to attract a larger labor pool and get the better workers.Which of the following would we expect to observe about Firm X (as compared to the other firms in the industry)?

A) Firm X makes about the same rate of profit (as other firms).
B) Firm X will have a higher quit rate.
C) Firm X will set up its retirement package so workers retire early.
D) Firm X's wage will continually rise with seniority.

Question 24

Which of the following CANNOT explain why large firms tend to pay higher salaries?

A) Large firms find monitoring more expensive.
B) Large firms allow less independence and have more rigid discipline.
C) Large firms find job vacancies less costly.
D) Efficiency wages work better in large firms.

Question 25

Firm X is observed to pay more on average than other firms to its sales force.Compared to other firms,it pays less salary but more commissions to its salesforce.The turnover in its salesforce is also higher than other firms.Firm X earns the same rate of return as other firms.Which of the following is most consistent with these facts?

A) Firm X must pay more because it is attracting a more risk-averse sales force.
B) The higher pay reflects a greater investment by Firm X in the specific human capital of its salesforce.
C) The higher pay compensates the salesforce for putting more effort into selling, which in turn increases the productivity of its salesforce.
D) Its higher pay reflects a promotion-type tournament that sorts out those who don't want to work long hours.

Question 26

Which of the following can NOT explain why workers' earnings increase with experience?

A) Earnings are a reward for investment in training.
B) Workers with lots of experience at a firm tend to be very productive.
C) Productivity eventually decreases with age.
D) This practice reduces shirking.

Question 27

Firm X arranges its pay such that workers are underpaid early in their career but are overpaid later in their career such that workers are,if they stay with the firm,on net better off.A necessary condition for this method of underpayments followed by overpayments to work is that

A) less motivated workers are more likely to stay with the firm and thus need more incentives to work hard.
B) workers discount the future with a high interest rate.
C) this sequencing of pay raises worker productivity.
D) supervising workers is cheap and effective.

Question 28

The manager of Mel's Diner feels that most of his waiters are rude to customers and don't hustle enough.He proposes that all tips should be placed in one pot and divided on the basis of the number of customers served.This plan is likely to ________ hustle and ________ rudeness.

A) increase; decrease
B) increase; increase
C) decrease; decrease
D) decrease; increase

Question 29

Which of the following factors will favor paying compensation by time rather than by output?

A) Output is easily measured and monitored.
B) The production of output requires the cooperation of many workers across the firm.
C) The industry's output is not affected by national economic conditions.
D) Workers are risk-seeking rather than risk-averse.

Question 30

Which of the following would NOT (even if true)explain why wages rise with job tenure?

A) Workers become more productive the longer they are with the firm.
B) Over time, the firm is able to dismiss less productive workers.
C) Workers acquire more specific human capital the longer they are with the firm.
D) Starting with a lower wage and then letting wages rise with job tenure reduces the present value of wages paid to a worker by an employer.

Question 31

Students in a 100 person class agree beforehand to answer all 20 multiple choice questions with B.Under which of these grading methods is this likely to prove an effective agreement that does not produce cheating on the agreement (for example,by a few students answering the questions correctly)?

A) The professor gives the top five papers a 100, the next five best an 80, and the rest a 50.
B) The professor gives the highest score a grade of 100 and starts reducing scores by 5 points for every one wrong.
C) The professor subtracts 5 points from 100 for every question wrong.
D) The best paper gets an A, the rest an F.

Question 32

The best way to align the interest of corporate executives and company owners is probably to pay executives

A) based on annual profit.
B) a fixed salary.
C) based on the stock market value of the company.
D) based on sales of the firm.

Question 33

Assume the following is true: in the past,many firms promised their workers a certain type of pension plan in exchange for lower wages.Recently,these firms reneged on their promise by changing to another pension plan that was significantly less valuable to older workers (but was more valuable to younger workers).Assuming the original promised plan was expected to be profitable,why would firms change their plans?

A) Firms had to report the costs of these plans to stockholders.
B) Firms wanted to motivate older workers to work harder.
C) Due to technical change, the skills of older workers became less valuable.
D) Firms placed a higher value on having a good reputation.

Question 34

Which of the following makes a promotion tournament (where the winner gets a large prize,such as a promotion)an effective method for motivating workers?

A) Contestants must cooperate with each other to make the firm productive.
B) The person who wins gets a prize equal to how much better they are than others.
C) It is uncertain as to who will win.
D) There are many persons competing for the prize.

Question 35

Golf tournaments are promotion tournaments where the person coming in first gets substantially more than the person coming in second.Which of the following would likely decrease the difference in prize money going to the person coming in first (assuming the tournament sponsors want each player to give their best effort to playing good golf)?

A) Variation in playing conditions increase.
B) Players come to dislike the variation in pay more.
C) Players playing hard increase the money the tournament can make.
D) Golf rules are modified to allow players to hit each other with golf clubs.

Question 36

In a perfectly competitive economy,workers are well-informed and firms can monitor workers.Suppose the government then passes a "Worker Privacy Act" that makes it very expensive to monitor workers.Which of the following is most likely to occur?

A) Employment and wages will fall.
B) Employment will fall, but the effect on wages is uncertain.
C) Employment and wages will rise.
D) Wages will rise, but the effect on employment is uncertain.

Question 37

In a promotion tournament model,the salary of the winner will be higher when

A) the cost of the extra effort of the losers is lower.
B) there are many qualified participants.
C) it is easy for participants to sabotage the efforts of others.
D) participants are more diverse in their ability and effort levels.

Question 38

A firm penalizes workers who take excessive sick days.As a result,sick workers come to work,make other workers sick,and reduce the firm's productivity.This is an example of

A) moral hazard.
B) efficiency wage.
C) pay based upon measured aspects of work.
D) signaling.

Question 39

An employer and a worker,if both are honest and work hard,together produce $200,000 a year,of which the employer gets $50,000 and the worker $150,000.If either one is dishonest and lazy,they break up,the employer employs someone else and the worker gets another employer.The following shows what they might earn if they broke up.In which case is it likely that both the employer and the worker will be honest and hard-working?

A) If they break up, the employer makes $60,000 and the worker $80,000.
B) If they break up, the employer makes $20,000 and the worker $175,000.
C) If they break up, the employer makes $75,000 and the worker $175,000.
D) If they break up, the employer makes $25,000 and the worker $125,000.

Question 40

If the firm pays the following wages,the marginal revenue product (MRP)of workers goes up as shown.What is the optimal efficient wage for the firm (assuming it can only pay discrete dollar amounts)?

A) $7
B) $8
C) $9
D) $10

Question 41

In the rat race model,workers competing for a promotion work more hours to signal that they are willing to work long hours.What is unusual is that even those who like to work long hours end up working even longer hours.Why is this?

A) They are more risk-averse.
B) They need to outdo workers who don't like long hours but are willing to work temporarily long hours to get the promotion.
C) Their excess work is an example of moral hazard.
D) They find that excessive work hours are enjoyable and healthy.

Question 42

What is the firm-size effect? What accounts for the firm-size effect?

Question 43

Joe is paid a wage of $12 per hour.What are the advantages and disadvantages to the employer of paying Joe on the basis of time worked?

Question 44

A "signal" will not work to sort good from bad workers if

A) the signal is as costly to good workers as to bad workers.
B) bad workers are more risk-averse than good workers.
C) the signal is excessively expensive to bad workers.
D) good workers are more productive than bad workers.

Question 45

What is meant by the term opportunistic behavior in the context of an implicit contract? How can an implicit contract be structured to limit opportunistic behavior?

Question 46

How does the payment of an efficiency wage affect worker productivity?

Question 47

Discuss the concept of an implicit contract in the context of employment.

Question 48

Identify and discuss the two general problems that output-based pay schemes suffer from.

Question 49

What are the basic features of a promotion tournament? What are the potential problems with a promotion tournament?

Question 50

The use of tournament method of pay (paying winners much more than others)is commonly used in golf tournaments.Which of the following would NOT explain this result?

A) Trying harder to win has little effect on the chance of winning.
B) It is prohibited for one golfer to change the lie of another golfer's golf ball.
C) Fans are willing to pay more to see pros play at their best.
D) Playing conditions are usually similar for most players.

Question 51

About 30 percent of CEO pay is in the form of stock or stock options.What is the rationale for paying a chief executive officer with company stock or options to buy the company stock? What are the drawbacks of paying corporate decision makers with stock?

Question 52

How does a firm that employs an underpayment-now,over-payment later compensation scheme sequence the pay of its workers? Illustrate your explanation with the appropriate graph.

Question 53

A researcher finds that earnings are directly related to the length of time with current employer (tenure)in a randomly selected sample of 35-year old male workers.How would you explain this finding?

Question 54

Which of the following is NOT an example of an efficiency wage?

A) A firm paying a higher wage has less turnover costs.
B) A firm paying a higher wage has less supervision costs.
C) A firm paying a higher wage employs more educated workers.
D) A firm paying a higher wage gets more effort from its workers.

Question 55

A radically more progressive tax system (which taxes workers earning more at a much higher tax rate)will likely have which of these effects?

A) cause firms to move towards incentive systems that delay wage payments
B) encourage workers to seek employers better matched to their skills
C) cause firms to pay efficiency wages
D) cause firms to pay by salary rather than with piece rates