Deck 22: Managing Incentives

Question 1

Cheap cars are sometimes lemons, but they are still sold to unsuspecting customers, hurting repeat business. The lesson about incentives from this is that:

A) used car dealers must never be trusted.
B) incentives must be tied to effort.
C) what you pay for is not always what you want.
D) money is not everything.

Answer 1

C

Question 2

CEOs in the 1980s were given much stronger incentives to increase their firm's stock price by receiving:

A) an extraordinary amount of salary.
B) stock options.
C) a lucrative benefit package.
D) an annual vacation package.

Answer 2

B

Question 3

Strong incentives:

A) will always lead to cheating.
B) will typically be less effective than weak incentives since they always give the incentive to cheat.
C) might still be a good idea, even if they encourage cheating.
D) are only a good idea if the possibility of cheating can be eliminated.

Answer 3

C

Question 4

A successful organization aligns _____ with _____.

A) self-interest; the organization's interest
B) self interest; the social interest
C) social interest; the organization's interest
D) manager's interest; the social interest

Question 5

When incentives are strong:

A) people have more of an incentive to cheat.
B) "what you pay for" will not align with "what you get."
C) monitoring will be more difficult.
D) it will be difficult to predict the outcome.

Question 6

Careful design of an incentive scheme can narrow the gap between:

A) what you pay for and what you want.
B) effort and output.
C) what you pay for and what you do not pay for.
D) what you want and what you do not pay for.

Question 7

Centralized economic planning in the Soviet Union was the epitome of the top-down approach: factories received quotas from Moscow that they had to fill. Enforcing such orders was difficult since there were so many factories to monitor. For example, a nail factory might fulfill an order of 250,000 nails by making very small nails, or substandard nails. Suppose Moscow wants nails to build houses. It is actually paying for:

A) high-quality nails.
B) productivity improvements.
C) scrap metal.
D) whatever could minimally qualify as a "nail."

Question 8

Why did teacher cheating become more common in Chicago public schools?

A) The school system made it easier for teachers to get tenure.
B) A new policy that closed down schools with low test scores increased the incentive for cheating.
C) The school system had to rely on more substitute teachers because of budget issues.
D) Younger and less experienced teachers were replacing the retiring older teachers.

Question 9

Which is the best example of the problem of strong employee incentives with poor monitoring with respect to improving student performance by standardized testing?

A) Schoolteachers and administrators improved student test scores by changing incorrect answers.
B) Union officials overfunded teacher pension plans with state and local money.
C) Students were sharing answers by text messaging.
D) Teachers were not "clocking out" when on lunch break.

Question 10

Consider the two statements:
I. The closer "what you pay for" is to "what you want," then the more you can rely on strong incentives.
II. If you can't bridge the gap between "what you pay for" and "what you want" then strong incentive schemes can be better than weak incentive schemes.

A) I is true; II is false
B) I is false; II is true
C) I and II are both true.
D) I and II are both false.

Question 11

Which famous economist discovered widespread cheating by teachers?

A) Gary Becker
B) Paul Krugman
C) Steven Levitt
D) Emily Oster

Question 12

Suppose that a town with too many snakes decides to pay people a bounty for each dead snake. Which of the following best represents the problem with strong incentives?

A) The town's snake population remains stagnant since people really do not like dealing with them.
B) The demand curve for snakes will shift left and down.
C) The price of snakes will decrease, as they are no longer valued alive.
D) Townspeople might get into the business of breeding snakes and selling their dead bodies to the town's officials.

Question 13

What evidence was put forth for teachers cheating on standardized tests?

A) groups of students who had the same exact right and wrong answers
B) students who missed easy questions but got the hard questions right
C) students with high test scores in one year but who earned low test scores the next year
D) All of these things were found to have occurred.

Question 14

Tying executive compensation to stock prices may create incentives for:

A) CEOs to work harder and increase the profitability of the firm.
B) CEOs to overstate the firm's financial status.
C) Enron-type scandals.
D) All of these possibilities are correct.

Question 15

Schools are rewarded for how well their students perform on standardized test scores but allowed to exclude test scores for learning disabled students when submitting results to the state. What undesirable incentive does this policy provide?

A) work with low-performing students to increase their test scores
B) channel low-performing students into learning disability programs
C) increase vigilance in testing for learning disabilities
D) hire more special needs educators for the public school system

Question 16

When constructing an incentive scheme:

A) stronger incentives are always better.
B) weaker incentives never result in a strong outcome.
C) weaker incentives might be better if monitoring is difficult.
D) stronger incentives typically work better in a corporate setting.

Question 17

The stronger the incentives:

A) the less it pays to invest in careful measurement and auditing.
B) the more it pays to invest in careful measurement and auditing.
C) the less important the incentive's effects.
D) the stronger the incentive's effects.

Question 18

Which of the following programs would NOT be favored by economists Hart, Shleifer, and Vishny and why?

A) Public prisons replace private prisons because tight budget constraints reduce the incentive to increase quality.
B) Public prisons replace private prisons because the profit motive increases the incentive to increase quality.
C) Private prisons replace public prisons because the profit motive encourages cost-cutting at the expense of quality.
D) Private prisons replace pubic prisons because slack budget constraints increase the incentive to increase quality.

Question 19

The famous economist ________ studied teacher cheating in ________ public schools.

A) Steven Levitt; Chicago
B) Carl Menger; Detroit
C) Robert Barro; Boston
D) Joseph Schumpeter; Philadelphia

Question 20

It is true that incentives matter, and:

A) getting incentives right is not a major issue.
B) the right incentives can be hard to figure out.
C) the ideal would be to remove all incentives.
D) using wrong incentives is better than no incentives.

Question 21

If one cannot monitor prison quality then privatizing prisons would most likely lead to:
I. lower-cost prisons.
II. higher-quality prisons.
III. less guard-inmate violence.

A) I and III only
B) I only
C) III only
D) I, II, and III

Question 22

Why is government bureaucracy less likely to cut costs than private companies?

A) Government bureaucrats are less likely to have majored in business than those working for private companies.
B) There is no profit motive for government bureaucracies to cut costs.
C) Because lower costs mean less profit for government bureaucracies.
D) People that cannot succeed in business work for government bureaucracies.

Question 23

The usual argument against government bureaucracy is that:

A) with budget constraints public bureaucracies won't have an incentive to maintain sufficient quality.
B) with budget constraints public bureaucracies will have to cut costs at the expense of quality.
C) without the profit incentive public bureaucracies will have to increase costs to maintain the quality.
D) without the profit incentive public bureaucracies won't have an incentive to cut costs.

Question 24

Compensating salespersons for the number of cars they sell is an example of:

A) an hourly wage.
B) a production output wage rate.
C) a piece rate.
D) a reverse incentive.

Question 25

The concern about private prisons is that:

A) they will increase profits by cutting costs and lowering quality.
B) they will charge taxpayers too much money by raising the prices of their services to monopoly levels.
C) there is no incentive for them to be efficient.
D) they might pay their staff above market wages, leading to a surplus of prison labor.

Question 26

Which of the following are arguments in favor of private prisons?
I. Private prisons are likely to have lower costs than public prisons.
II. Private prisons have a stronger incentive to reduce inmate violence because it lowers costs.
III. Private prisons have a stronger incentive to uphold prisoner's civil rights because it reduces expensive lawsuits.

A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question 27

Suppose that a car dealer in California advertises that its sales staff is not paid on commission. Which of the following is correct with regards to the strategy of this advertising?

A) Car dealers who rely on repeat business prefer a low-pressure, informative sales staff.
B) Car dealers who rely on selling cars to first-time buyers prefer a lower-pressure, informative sales staff.
C) Car dealers who rely on repeat business prefer high-pressure sales tactics.
D) Car dealers who rely on selling cars to first-time buyers prefer high-pressure sales tactics.

Question 28

Paying car salespeople by commission may lead to:

A) overly aggressive car salespeople and unethical sales pitches.
B) salespeople willing to work long hours.
C) fewer repeat customers for the car dealership.
D) All of these possibilities are correct.

Question 29

What is the concern with private prisons?

A) Private prisons may cut costs to increase profit at the expense of prisoner rehabilitation programs, civil rights, and safety.
B) The increased efficiency of private prisons may put public prisons out of business.
C) Private prisons will cost taxpayers too much money to operate because they will cut costs in the short run and decrease recidivism rates.
D) Private prisons are likely to overemphasize quality and cost taxpayers too much money in the long run.

Question 30

Higher product quality:

A) can sometimes lead to lower product costs.
B) requires a strong incentive scheme.
C) requires a weak incentive scheme.
D) is most easily achieved through a publicly provided system.

Question 31

Which of the following would be the LEAST likely result of efficient private prisons replacing inefficient public prisons?

A) higher quality and lower cost
B) higher quality and higher cost
C) lower quality and lower cost
D) lower quality and higher costs

Question 32

An example of piece rate work is paying workers:

A) by the hour.
B) a fraction of the firm's profit.
C) $0.25 for every pound of apples picked.
D) a bonus for meeting a profit goal.

Question 33

Pirate captains during the 1600s compensated crewmembers with a form of health insurance. If a member lost a hand or leg or other appendage during a fight, he would get a free prosthetic (e.g., a wooden leg, which were quite expensive even then). What kind of incentive structure does this most closely resemble? (Hint: Those who lost a limb generally did so because they were doing a larger share of the fighting.)

A) hourly rates
B) tournaments
C) piece rates
D) corporate culture

Question 34

Public bureaucracies:

A) typically lead to the low-cost outcome.
B) are typically just as efficient as private corporations.
C) typically have less incentive to minimize costs because there is no profit incentive.
D) still typically minimize costs because they are paid higher wages.

Question 35

When are hourly rates preferred to piece rates?

A) when it is difficult to measure output
B) when employees demand it
C) when wage equality isn't very important
D) when one person is much better than the rest

Question 36

How might the issues surrounding public and private prisons be similar to those of nonprofit and for-profit nursing homes?

A) For-profit nursing homes might have higher costs than nonprofit nursing homes, but the higher costs are from better patient care.
B) For-profit nursing homes might have lower costs than nonprofit nursing homes, but the lower costs might result in poor quality patient care.
C) For-profit nursing homes might have higher costs than nonprofit nursing homes, but the higher costs might result in superior patient care.
D) Compared with nonprofit nursing homes, for-profit nursing homes are less likely to adapt to changing market conditions.

Question 37

The incentive to cut costs is ________ for ________ prisons (as/than) it is for ________ prisons.

A) about the same; private; public
B) smaller; private; public
C) greater; private; public
D) greater; public; private

Question 38

Private prisons in the United States hold about ______ of all prisoners.

A) 8%
B) 33%
C) 45%
D) 80%

Question 39

Piece rate compensation schemes do not work well when:

A) quality is important and quality control is inexpensive.
B) quality is not very important and quality control is inexpensive.
C) quality is important and quality control is expensive.
D) quality is not very important and quality control is expensive.

Question 40

Automaker Henry Ford famously paid high wages to his workers. In 1914, he offered $5 a day (about $107 today) for assembly line work.. The offer resulted in long lines for Ford jobs, little worker turnover, and high-quality workers. Paying above-market wages may improve profits better than piece rate incentives if:

A) supported by intrinsic motivation.
B) product quality is not a concern.
C) environmental risks are not a factor.
D) worker effort is easily observable.

Question 41

Which of the following are problems with a piece rate system?
I. The piece rate system might attract the least productive workers.
II. Workers might be concerned more about quantity than quality.
III. Inevitably, piece rate systems cause wages to rise more than productivity.

A) I only
B) II only
C) I, II, and III
D) III only

Question 42

Piece rate pay works better when:

A) output is harder to measure.
B) output is easier to measure.
C) quality matters a great deal.
D) monitoring is expensive.

Question 43

The difference between a piece rate and an hourly rate is:

A) a piece rate is a wage for each piece of work completed whereas an hourly rate is a rate for each hour of work completed.
B) a piece rate is only offered for non-contractual workers whereas an hourly rate is only offered for contractual workers.
C) a piece rate is not tied to effort whereas an hourly wage is tied to effort.
D) None of the answers is correct.

Question 44

Safelite Glass Corporation increased productivity by 44% by:

A) paying workers a bonus for showing up to work early.
B) hiring more managers to monitor worker effort.
C) paying workers to stay home if they are sick.
D) paying workers directly for their output.

Question 45

Bjorn is a lazy worker with low productivity who works because he has to, not because he wants to. Amal is a very productive worker, enjoys what he does, and works quickly and accurately. Based on this information, which of the following is TRUE?

A) The piece rate incentive scheme would result in equal productivity for both workers.
B) Bjorn should be offered an hourly wage, whereas Amal should be offered a piece rate.
C) Amal should be offered an hourly wage, whereas Bjorn should be offered a piece rate.
D) An equal hourly wage would be appropriate for both these workers.

Question 46

The establishment of a piece rate system can lead to increased productivity and higher quality work if:
I. the piece rate is considerably higher than existing wages.
II. the workers are held responsible for the jobs that they personally complete.
III. there is a reliable measure of quality control.

A) I only
B) II and III only
C) III only
D) I, II, and III

Question 47

Use the following to answer questions: Figure: Weekly Pay
(Figure: Weekly Pay) Firms A and B are radio stations that hire salespeople to sell advertising slots. The firms' compensation schemes appear in the figure. Which of the following statements is TRUE?
I. A worker that could sell seven ads per week would want to work for Firm A.
II. A worker that could sell five ads per week would be willing to work for either firm.
III. A worker that could sell only three ads per week would want to work for Firm B.

A) I, II, and III
B) I and III only
C) II only
D) I and II only

Question 48

Piece rates do not work well when:

A) workers use tools in production.
B) quality is not important.
C) quality control is important and simple to perform.
D) quality is important but quality control is expensive.

Question 49

When Safelite Glass Corporation switched to a piece rate system of compensation in 1994, productivity:

A) decreased by 44%.
B) decreased by 22%.
C) increased by 22%.
D) increased by 44%.

Question 50

In order for a piece rate to result in high-quality output by workers, it requires:

A) no environmental risk.
B) the piece rate to be lower than the hourly wage.
C) good quality control.
D) workers to have equal abilities.

Question 51

Quality control is an important element of an effective ______ pay scheme.

A) piece rate
B) wage rate
C) smooth rate
D) overtime

Question 52

______ can benefit from a piece rate pay system.

A) Only firms
B) Only workers
C) Neither firms nor workers
D) Both firms and workers

Question 53

Paying grape pickers by the hour is an example of ______ pay.

A) piece rate
B) wage rate
C) smooth rate
D) overtime

Question 54

Use the following to answer questions: Figure: Piece Rates
(Figure: Piece Rates) Refer to the figure. A piece rate is offered for every 10 bags of wheat that workers fill. Which of the three piece rates plotted in the figure above has the lowest dollar value to the firm?

A) P₁
B) P₂
C) P₃
D) All three piece rates are of equal value.

Question 55

The main advantage of piece rate pay is:

A) decreased labor costs.
B) increased quality.
C) increased productivity.
D) easy implementation.

Question 56

Use the following to answer questions: Figure: Weekly Pay
(Figure: Weekly Pay) Firms A and B are radio stations that hire salespeople to sell advertising slots. The firms' compensation schemes appear in the figure. Assuming that all workers put in the same amount of hours, firm A pays its salespeople using a(n) ______ and firm B pays its workers using a(n) ______.

A) hourly wage; hourly wage
B) hourly wage; piece rate system
C) premium plus fee; flat rate
D) piece rate system; hourly wage

Question 57

When productivity is variable, piece rates tend to ______ compared with wage rates.

A) decrease earnings inequality
B) keep earnings inequality constant
C) increase earnings inequality
D) change earnings inequality in an indeterminate manner

Question 58

When IBM paid programmers per line of code, IBM programmers produced:

A) small amounts of low-quality code.
B) small amounts of high-quality code.
C) large amounts of low-quality code.
D) large amounts of high-quality code.

Question 59

Paying grape pickers by the pound is an example of ______ pay.

A) piece rate
B) wage rate
C) smooth rate
D) overtime

Question 60

Use the following to answer questions: Figure: Piece Rates
(Figure: Piece Rates) Refer to the figure. A piece rate is offered for every 10 bags of wheat that workers fill. Which of the three piece rates plotted in the figure above has the highest dollar value to the firm?

A) P₁
B) P₂
C) P₃
D) All three piece rates are of equal value.

Question 61

Job X pays a yearly salary of $52,000, regardless of the state of the economy. Job Y pays a yearly salary of $10,000 in a bad economy and $70,000 in a good economy. The probability of a bad economy is 0.30. Which job would most people prefer?

A) Job Y because the expected payoff is $70,000 70% of the time.
B) Job X because it is more certain than the $52,000 expected payoff of Job Y.
C) Job X because $52,000 exceeds the expected payoff of Job Y by $3,000.
D) Job Y because the expected payoff of $70,000 is greater than $55,000.

Question 62

Job X pays a yearly salary of $55,000, regardless of the state of the economy. Job Y pays a yearly salary of $10,000 in a bad economy and $70,000 in a good economy. The probability of a bad economy is 0.30. Which job would most people prefer?

A) Job Y because the expected payoff of $80,000 is greater than $55,000.
B) Job X because $55,000 exceeds the expected payoff of Job Y of $52,000.
C) Job X because $55,000 exceeds the expected payoff of Job Y by $6,000.
D) Job Y because the expected payoff of $70,000 is greater than $55,000.

Question 63

When sales depend heavily on outside factors such as the state of the economy, strong incentives may:

A) be more expensive than they are worth.
B) be less expensive than they are worth.
C) equal what they are worth.
D) be worthless.

Question 64

A piece rate is:

A) any payment system that pays workers directly for their input.
B) any payment system that pays workers directly for their output.
C) any payment paid in pieces to workers.
D) the percentage of a payment paid weekly to workers.

Question 65

Even though firms and workers can both benefit from piece rates, piece rates are sometimes not implemented because of:

A) government regulation.
B) a shortage of workers.
C) fear of a decrease in the piece rate.
D) All of the answers are correct.

Question 66

A piece rate is:

A) the discounted present value of a day's worth of production output.
B) an hourly rate paid to mid-level managers.
C) a method to compensate workers for the number of units of output they produce.
D) the interest rate paid to finance a firm's output costs.

Question 67

Piece rates do not work well when:

A) quality is important but quality control is expensive.
B) quality is important and quality control is not costly.
C) quality is not important and quality control is not costly.
D) quality is not important but quality control is expensive.

Question 68

If a firm's owner is better able than the sales staff to bear the risk of a recession, weak incentives:

A) are worse than strong incentives.
B) may be better than strong incentives.
C) should not be used.
D) would not be profitable.

Question 69

When using a piece rate system:

A) it is important to measure and observe worker quality.
B) a firm may attract more unproductive workers.
C) a firm will experience a decrease in output.
D) All of the answers are correct.

Question 70

Which of the following statements about piece rate pay is TRUE?
I. Piece rate systems will attract more productive workers than hourly wage plans.
II. Workers may fear that the piece rate could be lowered in the future.
III. Less productive workers may prefer an hourly wage.

A) I and II only
B) III only
C) I and III only
D) I, II, and III

Question 71

The riskier the payments are to workers, the:

A) more a firm must pay on average.
B) less a firm must pay on average.
C) more a firm must rely on piece rate pay.
D) fewer the workers who will take on work.

Question 72

A piece rate system ________ earnings inequality.

A) has no effect on
B) increases
C) decreases
D) first increases then decreases

Question 73

As performance pay becomes more common in an economy:

A) wage rates would increase more than productivity in the economy.
B) the number of unemployed workers in the economy would also increase.
C) the inequality of earnings in the economy would also increase.
D) All of the answers are correct.

Question 74

Which of the following may make weak incentives mutually profitable for both owner and sales staff?

A) If the sales staff is better able than the owner to bear the risk of a recession.
B) If the owner is better able than the sales staff to bear the risk of a recession.
C) If the owner and sales staff can equally bear the risk of a recession.
D) If neither the owner nor the sales staff has to bear the risk of a recession.

Question 75

Two students are given a project to work on together. Each student could either work or shirk. There is no individual accountability; each student receives the same grade regardless of how much work he or she contributes. One student is a weak student who prefers partying and the other is a serious student who prefers working hard. How can the teacher adjust the incentive scheme to ensure equal effort by both students?

A) Ask each student to evaluate the other and use that assessment in grading the project.
B) Ask the more serious student to put in as much effort as possible.
C) Ask the weaker student to put in as much effort as possible.
D) Leave the incentive scheme as is-the students will automatically put in equal effort.

Question 76

A very motivated and skilled salesperson may not have good sales if which of the following factors occurs?
I. The product is of a low quality.
II. The economy is in a recession.
III. The price of the product is too high compared with competing products.

A) II only
B) I and II only
C) I and III only
D) I, II, and III

Question 77

Two students are given a project to work on together. Each student could either work or shirk. There is no individual accountability; each student receives the same grade regardless of how much work he or she contributes. One student is a weak student who prefers partying and the other is a serious student who prefers working hard. What is the most likely outcome in this scenario?

A) The serious student will end up completing most of the project alone.
B) The weak student will end up completing most of the project alone.
C) Both students will work equally hard on the project.
D) Neither student will complete the project.

Question 78

Rajesh owns a pizza shop and pays his workers per pizza made. His ingredients are fresh and the recipe is good but he has few repeat customers because his pizzas are hastily made. He wants to redesign his incentive scheme. What would you suggest that Rajesh do?

A) pay a bonus tied to increased sales and customer satisfaction
B) switch to an hourly wage
C) continue paying the workers per pizza made
D) provide an extra bonus based on worker productivity

Question 79

Which of the following is the most correct statement about piece rates?

A) A piece rate firm would attract less productive workers because piece rates reduce the incentive to work hard.
B) A piece rate firm would attract more productive workers because piece rates usually require some form of quality control.
C) A piece rate firm would attract less productive workers because piece rates do not work well when quality is important.
D) A piece rate firm would attract more productive workers because piece rates give productive workers a chance to earn more money.

Question 80

IBM paid programmers by the number of lines of code written, which resulted in:

A) too many lines of poor-quality code.
B) primarily high-quality code.
C) increased profits.
D) increased sales revenue.