Deck 13: The Internal Organization of the Firm

Question 1

A revenue-sharing plan might be appealing to an entrepreneur because it would enable the boss to motivate workers

A) by paying them excessively high wages
B) through deploying a costly staff of managers
C) without having to use costly inspectors

Answer 1

without having to use costly inspectors

Question 2

Workers will shirk if and only if they perceive they will be

A) neither better nor worse off doing so
B) better off doing so
C) worse off doing so

Answer 2

better off doing so

Question 3

In group incentive schemes, the rewards to any individual agent depend not only on his or her actions, but also on the actions of the other agents in the group or tournament.

Answer 3

True

Question 4

A forcing contract is an incentive scheme in which a target output is set for the entire group and payments are received by all workers if the group's output exceeds this target.

Question 5

Efficiency wages are paid by a firm to its workers, which are above the market-clearing level in order to increase their productivity or efficiency.

Question 6

In addition to motivating the desired level of effort, a forcing-contract plan may lead to

A) slightly reduced effort
B) greater than expected effort
C) no effort at all

Question 7

A system in which workers are compensated not on the basis of their absolute output, but rather on the basis of their output relative to the output of others is known as a rank-order tournament.

Question 8

In an economic tournament, the higher the effort level a player chooses, the less the effort costs and the greater the net benefits the player will receive from that effort.

Question 9

A rank-order tournament is an example of a(n)

A) forcing contract
B) economic tournament
C) principal-agent problem

Question 10

The wage an agent could earn at the next-best work opportunity is called the opportunity wage.

Question 11

In an unfair tournament, it is more costly for one group of agents to perform the same tasks than for others.

Question 12

A specific input is a capital good that has

A) many uses
B) no uses
C) only one specific use

Question 13

Under a revenue-sharing plan, if the amount of money saved by working less hard is __________ than the resulting loss in earnings, each worker will ___________ assigned duties.

A) greater, work harder at
B) greater, shirk
C) less, shirk

Question 14

In an uneven tournament, the rules of the tournament treat people differently, giving an advantage to one identifiable group.

Question 15

In the long run, a dishonest forcing-contract firm

A) runs the risk of losing its workers because they cannot make a living
B) will find it very difficult to hire replacement workers
C) Both answers are correct

Question 16

A business entity that hires labor and capital to produce a product is known as a(n)

A) employee
B) firm
C) resource

Question 17

A constraint in a contract, which ensures the agent is better off taking the contract and joining the firm rather than not, is called the participation constraint.

Question 18

In a very large firm, it is not possible to measure the

A) output of the enterprise
B) individual effort of each employee
C) profit of the enterprise

Question 19

A general input is a capital good that has

A) many uses
B) no uses
C) only one specific use

Question 20

A moral hazard occurs whenever there are incentives for economic agents who cannot be monitored to behave in a manner contrary to what is expected of them.

Question 21

According to the Nalbantian-Schotter experiment, forcing contracts are ___________ revenue sharing as incentive mechanisms in terms of maintaining high output levels.

A) equal to
B) worse than
C) better than

Question 22

In a two-person economic tournament, each player's payoff will be a function not only of the player's choice of an effort level, but also of the

A) firm's revenue
B) probability of being caught shirking
C) competitor's choice

Question 23

In a forcing-contract scheme, if you work hard and exert high level of effort and either one person in your group shirks or you get a bad random draw (bad luck), the result can have

A) negative payoff
B) zero payoff
C) Neither answer is correct

Question 24

Describe what laboratory tests of affirmative action programs found when the amount of historical discrimination is not great, that is, the cost asymmetry of the agents is not too large.

Question 25

The person who is acting on behalf of a principal is called the

A) vice principal
B) agent
C) employer

Question 26

Is there a Nash equilibrium under a revenue-sharing plan?

Question 27

In a rank-order tournament, what are the two ways that the choice of an effort level influences each player's payoff?

Question 28

When actions are unobservable, the principal will write contracts in terms of

A) actions
B) outcomes
C) efforts

Question 29

One result of testing laboratory affirmative action programs is that

A) workers who are highly discriminated against always remain discouraged and exert zero effort
B) organization output declines if the amount of historical discrimination has been great
C) nondisadvantaged workers, in an effort to maintain their promotion rate, work hard and the output of the organization rises

Question 30

Which of the following is not an effect of discrimination?

A) every worker is treated fairly and equally
B) some groups cannot attend the best schools
C) some workers are denied the training they need to be equal competitors

Question 31

When writing contracts when actions are unobservable, it is assumed that, while the firm is risk _____________ and able to diversify its risk, the worker is risk _____________ because all of the worker's income is derived from the job.

A) preferring, neutral
B) neutral, averse
C) averse, preferring

Question 32

When writing contracts when actions are unobservable, what is the second step taken by the principal?

A) calculating the participation constraint
B) calculating the incentive compatibility constraint
C) calculating profits with different amounts of revenue and wages

Question 33

The person employing the agent is called the

A) employee
B) principal
C) big meanie

Question 34

Which of the following situations is most realistic in principal-agent situations?

A) writing contracts when actions are unobservable
B) taking actions when contracts are unannounced
C) writing contracts when actions are observable

Question 35

If an agent puts forth a high level of effort, the firm's expected revenues are $62,000. If shirking occurs, expected revenues are $49,000. The firm must pay the agent at least $40,000 to join the firm and make the high effort. At least $20,000 must be paid to get the worker to join the firm and make the low effort. The principal would prefer the worker to join the firm and put forth

A) no effort
B) the low-effort level
C) the high-effort level

Question 36

An incentive compatibility constraint is a constraint in a contract that ensures the agent

A) will be willing to take the prescribed action once the agent joins by offering incentives to do so
B) is better off taking the contract and joining the firm rather than not
C) realizes that rewards depend not only on the agent's actions, but also on the actions of the other agents in the tournament

Question 37

After graduation, you get a job as an editorial assistant in a publishing company. In this entry-level job, you fill out forms, answer the phone, and send emails at the direction of members of an editorial team. Are you an agent or a principal?

Question 38

Can a firm prevent the moral hazard problem of workers shirking?

Question 39

Sometimes the output of a worker results not just from the amount of effort the worker exerts, but also from some random element such as

A) the probability of being caught shirking
B) crime rates
C) luck