Deck 19: Getting Employees to Work in the Firms Best Interest

Question 1

​Moral hazard is a

A)​Pre-contractual problem
B)Post contractual problem
C)Post firing problem
D)​None of the above

Answer 1

B

Question 2

​If a principle is reducing agency costs by gathering information about the agent's type,he is most likely trying to solve the problem

A)​Adverse selection
B)Moral hazard
C)Both of the above
D)​None of the above

Answer 2

A

Question 3

​The problem the agent faces when deciding which agent to hire is called

A)​Adverse selection
B)Moral hazard
C)Both of the above
D)​None of the above

Answer 3

A

Question 4

​Information gathering for an adverse selection happens

A)​Before the agent is hired
B)After the agent is hired
C)After the agent is fired
D)​None of the above

Question 5

​The types of problems in principal-agent relationships typically include

A)​adverse selection - whom to hire
B)moral hazard - how to motivate workers
C)uncertainty - how many workers will be needed
D)​Both A&B

Question 6

​Which of the following is true?

A)​Incentive compensation imposes no risks on the agents and thus should not affect their compensation
B)Incentive compensation imposes risk on the agent but need not be compensated for
C)Incentive compensation imposes risk on the agent for which they should be compensated
D)​Incentive compensation is a bad idea

Question 7

​In a principal-agent relationship

A)​the principal wants the agent to act on her own behalf
B)the agent wants the principal to act on his behalf
C)the principal wants the agent to act on the behalf of others
D)​the agent wants the principal to act on the behalf of others

Question 8

​To ensure that decision makers have enough information to make god decisions

A)​Move information to those making the decisions
B)Move decision making to those with the information
C)All of the above
D)​None of the above

Question 9

​In a situation where a car salesman is selling cars on behalf of the dealer,the dealer is the

A)​Principal
B)Agent
C)Both of the above
D)​None of the above

Question 10

​If a principle is reducing agency costs by gathering information about the agent's actions,he is most likely trying to solve the problem

A)​Adverse selection
B)Moral hazard
C)Both of the above
D)​None of the above

Question 11

​A potential problem arises in principal-agent relationships

A)​because the agents and the principals have identical goals
B)because the principals may want to minimize his profits,while the agent may want to maximize them
C)because the agents may have different goals from the principals
D)​the goals of principals and agents are irrelevant

Question 12

​A potential problem arises in principal-agent relationships

A)​because the agents' actions are not always observed by the principals
B)because the principals' actions are not always observed by the agents
C)because the agent's and the principals' actions are always observed by each other
D)​the observability of actions is irrelevant

Question 13

​In an ideal organization,when do agents always make decisions in the best interests of their principle?

A)​The decision makers have the information necessary to make the decision
B)The decision makers have the incentive to make the right decision
C)All of the above
D)​None of the above

Question 14

​In a situation where an artist is selling his own work to the galleries,the agent is

A)​The artist
B)The gallery
C)Both of the above
D)​None of the above

Question 15

​The problem the agent faces when deciding how to keep the agent motivated is called

A)​Adverse selection
B)Moral hazard
C)Both of the above
D)​None of the above

Question 16

​Adverse selection is a

A)​Pre-contractual problem
B)Post contractual problem
C)Post firing problem
D)​None of the above

Question 17

​Adopt incentive compensation

A)​Under all circumstances since it is the best solution
B)Only if it is effective in making the agent work harder
C)Only if its results exceed its costs
D)​Only B&C

Question 18

​In a situation where a car salesman is selling cars on behalf of the dealer,the salesman is the

A)​Principal
B)Agent
C)Both of the above
D)​None of the above

Question 19

​Information gathering for a moral hazard problem happens

A)​Before the agent is hired
B)After the agent is hired
C)After the agent is fired
D)​None of the above

Question 20

​In a situation where an artist is selling his own work to the galleries,the principle is

A)​The artist
B)The gallery
C)Both of the above
D)​None of the above

Question 21

​Which of the following addresses agency costs?

A)​spot checks of the quality of employee work
B)hiring only from job fairs
C)instituting longer work days
D)​reducing the number of holidays

Question 22

​The ways to address agency costs include all EXCEPT

A)​running background checks on prospective employees
B)requiring employees to punch time clocks
C)instituting longer work days
D)​replacing closed offices with cubical office spaces

Question 23

​Which of the following is true?

A)​Decision making should never be centralized
B)If you decide to centralize the decision making authority,figure out a way to keep information hidden from it
C)If you decide to centralize the decision making authority,figure out a way to transfer information to the third party
D)​If you decide to centralize the decision making authority,figure out a way to transfer information to the decision maker

Question 24

​Monitoring

A)​Gives the principle a better performance evaluation metric
B)Allows the principle to better align the incentives of the agent with the goals of the principle
C)Can be costly for the principal
D)​All of the above

Question 25

​Examples of incentive pay include

A)​commission sales
B)providing onsite parking for employees
C)cleaning the worksite with weekly janitorial service
D)​offering a certain number of sick days

Question 26

​The ways to address agency costs include all EXCEPT

A)​advertising for employee positions in as many outlets as possible
B)requiring employees to punch time clocks
C)spot checks of the quality of employee work
D)​replacing closed offices with cubical office spaces

Question 27

​The ways to address agency costs include all EXCEPT

A)​running background checks on prospective employees
B)hiring only from job fairs
C)spot checks of the quality of employee work
D)​replacing closed offices with cubical office spaces

Question 28

​Consider an apple orchard owner deciding how to incentivize his fruit pickers.He pays per pound harvested but adjusts the compensation rate higher during poor harvest seasons.As a consequence

A)​The picker's effort would not depend on the compensation rate
B)The pickers would claim poor harvests in order to be paid higher piece rates even during bountiful harvest seasons
C)The pickers would claim good harvests in order to be paid higher piece rates even during poor harvest seasons
D)​None of the above

Question 29

​Which of the following is true?

A)​Decision making should never be centralized
B)When decentralizing decision making,figure out a way to transfer information to the decision maker
C)When decentralizing decision making,strengthen incentive compensation schemes
D)​When decentralizing decision making,weaken incentive compensation schemes

Question 30

​Which of the following addresses agency costs?

A)​advertising for employee positions in as many outlets as possible
B)requiring employees to punch time clocks
C)instituting longer work days
D)​reducing the number of holidays

Question 31

​An incentive conflict is when

A)​The agent and the principal have identical incentives
B)The agent has different incentives than does the principal
C)The agent and the principal neither have any incentives to work hard
D)​None of the above

Question 32

​Consider an apple orchard owner deciding how to incentivize his fruit pickers to get them to pick more apples he should:

A)​To pay the pickers per pound of apples picked
B)To pay the pickers an hourly rate
C)To pay the pickers an hourly rate plus a bonus
D)​To not pay the pickers

Question 33

​Consider an apple orchard owner deciding how to incentivize his fruit pickers.He pays per pound harvested but adjusts the compensation rate higher during poor harvest seasons.As a consequence

A)​The compensation rate should be fixed at all times
B)The pickers might try to game the system by discouraging others from harvesting too much
C)The pickers would claim good harvests in order to be paid higher piece rates even during poor harvest seasons
D)​None of the above

Question 34

​The ways to address agency costs include all EXCEPT

A)​running background checks on prospective employees
B)requiring employees to punch time clocks
C)spot checks of the quality of employee's work
D)​providing better coffee machines in the lunch room

Question 35

​To incentivize employees

A)​Measure performance,whether formally or informally
B)Tie the performance metrics to compensation
C)All of the above
D)​None of the above

Question 36

​In managerial economics,agency costs refer to

A)​booking travel arrangements
B)model and actor representation
C)imperfections in dealing with those hired
D)​foreign espionage

Question 37

​Which of the following addresses agency costs?

A)​advertising for employee positions in as many outlets as possible
B)hiring only from job fairs
C)spot checks of the quality of employee work
D)​reducing the number of holidays

Question 38

​The ways to address agency costs include

A)​gathering information about the agent's characteristics before hiring
B)gathering information about the agent's actions once hired
C)incentivizing agents to work on behalf of principals
D)​all of the above

Question 39

​Which of the following addresses agency costs?

A)​advertising for employee positions in as many outlets as possible
B)hiring only from job fairs
C)instituting longer work days
D)​replacing closed offices with cubical office spaces

Question 40

​To avoid employees "gaming" the system

A)​Try to anticipate the more obvious games
B)Adjust the compensation scheme to avoid the most obvious games
C)Monitor outcomes to ensure that you are getting the behavior you desire
D)​All of the above

Question 41

​The components of a well-run incentive compensation scheme include all of the following EXCEPT

A)​evaluating the identified performance measures
B)demonstrating that supervisors are friendly outside of the work environment
C)rewarding workers who for meet performance measures
D)​identifying the relevant measures on which to evaluate employees

Question 42

​The components of a well-run incentive compensation scheme include all of the following EXCEPT

A)​evaluating the identified performance measures
B)avoiding rewards for outcomes that are not included in the performance measures
C)demonstrating that evaluators can be influenced with small favors
D)​identifying the relevant measures on which to evaluate employees

Question 43

​When decision rights are decentralized,typically

A)​decisions are being moved to those with more of the relevant information
B)decisions are being moved to those with stronger incentives to make good decisions
C)decisions are being moved from those with more of the relevant information
D)​decisions are being moved from those with weaker incentives to make good decisions

Question 44

​When decision rights are decentralized,typically

A)​decisions are being moved to those with less of the relevant information
B)decisions are being moved to those with stronger incentives to make good decisions
C)decisions are being moved to those with more of the relevant information
D)​decisions are being moved from those with weaker incentives to make good decisions

Question 45

​Potential problems with incentive based compensation are

A)​not evaluating the relevant performance measures
B)rewarding outcomes that are not included in the performance evaluation
C)not granting rewards for meeting performance measures
D)​all of the above

Question 46

​A consequence of an incentive contract for employees is that

A)​employees must incur additional risk
B)employee level risk is reduced
C)employer level risk is reduced
D)​there are no risk related consequences

Question 47

​Examples of incentive pay include

A)​allowing employees a certain number of personal days
B)providing onsite parking for employees
C)cleaning the worksite with weekly janitorial service
D)​prizes to the employee team to win a project goal tournament

Question 48

​The components of a well-run incentive compensation scheme include all of the following EXCEPT

A)​evaluating the identified performance measures
B)avoiding rewards for outcomes that are not included in the performance measures
C)rewarding workers who for meet performance measures
D)​displaying the wealth disparities between the executives and the line workers

Question 49

​As a result of moving more decision making from the center toward the periphery of the organization,typically

A)​the flow of relevant information to the decision maker should be enhanced
B)the flow of relevant information from the decision maker should be enhanced
C)the incentives to make good decisions should be strengthened
D)​the incentives to make good decisions should be weakened

Question 50

​As a result of moving more decision making from the center toward the periphery of the organization,typically

A)​the flow of relevant information to the decision maker should be enhanced
B)the flow of relevant information from the decision maker should be enhanced
C)the incentives to make good decisions can be weakened
D)​the reporting of information that is required to make the decision can be relaxed

Question 51

​When decision rights are decentralized,typically

A)​decisions are being moved to those with less of the relevant information
B)decisions are being moved from those with stronger incentives to make good decisions
C)decisions are being moved from those with more of the relevant information
D)​decisions are being moved from those with weaker incentives to make good decisions

Question 52

​The components of a well-run incentive compensation scheme include all of the following EXCEPT

A)​performing random acts of kindness to employees
B)avoiding rewards for outcomes that are not included in the performance measures
C)rewarding workers who for meet performance measures
D)​identifying the relevant measures on which to evaluate employees

Question 53

​Because incentive contracts result in more risk placed on the part of agents

A)​the average level of compensation typically falls
B)the average level of compensation typically rises
C)compensation is unaffected
D)​employers want employees to insure against wild compensation swings

Question 54

​Incentive contracts typically result in higher risk-related compensation to agents on average,

A)​even so,they are always worth it
B)this does not affect their desirability
C)as a consequence,they may cost more than the problem they solve
D)​therefore,they are never worth it

Question 55

​An incentive compensation scheme includes

A)​a performance evaluation system
B)a disciplinary action committee
C)a reward system linked to performance
D)​Both A&C

Question 56

​Examples of incentive pay include

A)​allowing employees a certain number of personal days
B)royalties to textbook authors
C)cleaning the worksite with weekly janitorial service
D)​offering a certain number of sick days

Question 57

​When decision rights are decentralized,typically

A)​decisions are being moved to those with less of the relevant information
B)decisions are being moved to those with stronger incentives to make good decisions
C)decisions are being moved away from those with more of the relevant information
D)​decisions are being moved to those with weaker incentives to make good decisions

Question 58

​The three central questions for efficient organizational design include all EXCEPT

A)​does the decision maker have the relevant information?
B)is the decision maker in a supervisory role?
C)who is making the decision?
D)​does the decision maker have an incentive to make a good decision?

Question 59

​In organizational design issues,decision rights pertain to

A)​the legal workplace related rights of employees
B)the regulations governing how a potential customer chooses which product to purchase
C)the set of decisions that go with a particular position within the firm
D)​who gets to decide from which place co-workers will order lunch

Question 60

​Examples of incentive pay include

A)​allowing employees a certain number of personal days
B)providing onsite parking for employees
C)bonuses for meeting deadlines
D)​offering a certain number of sick days

Question 61

​A payday loan company has decided to open several new locations in the city.To decide where to open these locations it hires consultants and pays them per store opened.At the end of the quarter,the company notices a many of the new stores' sales volume fail to meet expectations.To incentivize the consultants to instead focus on opening profitable stores,the company decided to alter the compensation to a percentage of the profit earned per new store.This puts the consultants

A)​In a less risky position
B)A more risky position
C)In risk neutral position
D)​None of the above

Question 62

​A firm could persuade the sales agent to accept profit based compensation if the new commission is

A)​Positive sales biased
B)Negative sales biased
C)Sales neutral
D)​None of the above

Question 63

​By switching its sales agents to a sales neutral profit commission,the firm is trying to convince the agents

A)​To not change their sales patterns,as it would not change their compensation
B)Improve their compensation by pricing less aggressively
C)Improve their compensation by pricing more aggressively (lowering prices)
D)​None of the above

Question 64

​An HVAC company is selling heating and cooling equipment.It has separate sales and marketing units.The marketing unit would want to

A)​Price aggressively to ensure sales are made
B)Price less aggressively to ensure that profitable sales are made
C)Price at cost to maximize sales
D)​None of the above

Question 65

​To solve the principle agency problem,which of the following questions should you ask

A)​Who is making the bad decision?
B)Does the decision maker have all the relevant information?
C)Does the decision maker have the incentive to make the right decision?
D)​All of the above

Question 66

​Which of the following is a way to reduce agency costs?

A)​Change the decision maker
B)Transferring information to the decision maker
C)Change the decision maker's incentives
D)​All of the above

Question 67

​A payday loan company has decided to open several new locations in the city.To decide where to open these locations it hires consultants and must decide how to pay them.To align incentives,it should to pay the consultants

A)​Per store opened
B)A percentage of the profit earned per new store
C)A fixed contract amount
D)​All of the above

Question 68

​A feasible solution to ensure that the sales agents are pricing the merchandise in the firm's best interest and not too aggressively is to

A)​Never let them reduce the price
B)Let them control the pricing decision independently
C)Require the sales agents to obtain permission to reduce price below a specific threshold
D)​All of the above

Question 69

​As a result of moving more decision making from the periphery of the organization toward the center,typically

A)​the flow of relevant information to the decision maker should be enhanced
B)the flow of relevant information from the decision maker should be enhanced
C)the incentive structure for the decision maker should be strengthened
D)​the incentive structure for the decision maker can be eliminated

Question 70

​The conflict between the Vice President of Marketing and her sales staff arises because

A)​the sales staff are unwilling to offer discounts
B)the Vice President does not want to negotiate aggressively enough to maximize profits
C)the sales staff want to negotiate too aggressively
D)​the Vice President is more willing to offer discounts to make the sale

Question 71

​A payday loan company has decided to open several new locations in the city.To decide where to open these locations it hires consultants and decides to pay them per location opened.The company should expect to see

A)​A large number of badly selected stores
B)A large number of well selected stores
C)A small number of well selected stores
D)​A small number of badly selected stores

Question 72

​The best way to ensure that the sales agents are working in the firm's best interests is to

A)​Tell the agent what he should be doing
B)Provide the agent an incentive to work in your best interest
C)Force the agent to work in your best interest
D)​Fire the agent

Question 73

​As a result of moving more decision making from the periphery of the organization toward the center,typically

A)​the flow of relevant information to the decision maker can be weakened
B)the flow of relevant information from the decision should be enhanced
C)the incentive structure for the decision maker should be strengthened
D)​incentive compensation at the periphery can be weakened

Question 74

​The conflict between the Vice President of Marketing and her sales staff arises because

A)​the sales staff are too willing to offer discounts
B)the sales staff does not want to negotiate aggressively enough
C)the Vice President wants to negotiate too aggressively
D)​the Vice President is more willing to offer discounts to make the sale

Question 75

​A payday loan company has decided to open several new locations in the city.To decide where to open these locations it hires consultants and pays them per store opened.At the end of the quarter,the company notices a many of the new stores' sales volume fail to meet expectations.To incentivize the consultants to instead focus on opening profitable stores,the company has decided to alter the compensation to a percentage of the profit earned per new store.The company should expect to

A)​Pay the consultants more than they would per store
B)Pay the consultants less than they would per store
C)Pay the consultants the same
D)​None of the above

Question 76

​A firm wants to stop its sales agents from pricing too aggressively to make sales by requiring the agent to obtain a marketing manager's permission to reduce price below a specific threshold.This solution would only work if

A)​The marketing manager has no information about the matter at hand
B)The marketing manager can only get all the information on the case from the sales agent
C)Enough unbiased information is transferred to the manager to prevent an unprofitable price reduction
D)​All of the above

Question 77

​An HVAC company is selling heating and cooling equipment.Between its sales staff and the VP of Marketing,the sales staff would want to

A)​Price aggressively to ensure sales are made
B)Price less aggressively to ensure that profitable sales are made
C)Price at cost to minimize sales
D)​None of the above

Question 78

​A payday loan company has decided to open several new locations in the city.To decide where to open these locations it hires consultants and pays them per store opened.At the end of the quarter,the company notices a many of the new stores' sales volume fail to meet expectations.This is because

A)​The consultants are paid per store and not just profitable store locations
B)The consultants are paid per store and hence choose the best locations
C)The consultants would always choose the best locations
D)​None of the above

Question 79

​A firm can better align its salespersons goals to its own if

A)​It bases performance evaluation on revenues
B)It pays its salespeople a commission based on profits
C)It pays its salespeople a commission based on sales
D)​It pays its salespeople a salary

Question 80

​A payday loan company has decided to open several new locations in the city.To decide where to open these locations it hires consultants and pays them per store opened.At the end of the quarter,the company notices a many of the new stores' sales volume fail to meet expectations.To incentivize the consultants to instead focus on opening profitable stores,the company should have paid them

A)​Per store opened
B)A percentage of the profit earned per new store
C)A fixed salary
D)​All of the above