Deck 22: Ethics and Organizational Architecture

Question 1

Economist Jack Hirshleifer notes that,"Altruism economizes on the costs of policing and enforcing contracts." Since economics assumes that people act in a self-interested manner,what could he possibly mean?

Answer 1

Increased trust between contracting parties reduces the level of expected opportunistic behavior and contracting costs.As a result,monitoring costs decline.Thus,more contracts are made,and gains from trade increase.

Question 2

In the United States,there are numerous organizations,some sponsored by business and others that are independent of business,that monitor the behavior,the product quality,and the service provided by businesses.What role do these organizations have in the process of promoting ethical behavior?

Answer 2

These intermediaries help promote ethical behavior.They provide a monitoring function and thus help ensure product quality,etc.The public places trust in third-party monitors that have good reputations such as Moody's,Consumer Reports,etc.These organizations also help disseminate information about the businesses they are monitoring.Third-party monitors increase the efficiency of the marketplace.

Question 3

Economist Milton Friedman argued that the goal of corporations should be "to make as much money for its owners as possible while conforming to the basic rules of society." What does this mean in terms of corporate ethical behavior?

Answer 3

Friedman advocates keeping business deals within the law and satisfying basic expectations of acceptable business dealing (honesty,etc.).This means that it usually is more efficient for the corporation to focus on creating wealth and to let its shareholders,employees,and customers choose the beneficiaries of their charitable contributions.By maximizing their shareholders' (or owners')wealth,corporations can effectively enlarge the pool of individual (noncorporate)resources available for charity.

Question 4

Ralph Nader has long argued that large corporations in oligopolistic markets should use their vast productive powers to redress social ills.Implementing this policy may put companies:

A)in conflict with the government.
B)in conflict with its trade unions.
C)in conflict with the process of wealth maximization.
D)in conflict with their international policies.

Question 5

Johnson & Johnson,a personal care products company,has a four-tiered credo or mission.In order,it states its relationship to customers,employees,communities,and finally stockholders.This credo seems to have improved the ethical standards of this corporation.Why doesn't it conflict with wealth creation?

Question 6

To design a value-increasing architectural system we need:

A)top management to assign decision rights,middle management to evaluate performance,and an external agency to sanction unethical behavior.
B)a clear partition between assigning decision rights and evaluating performance from sanctioning unethical behavior.
C)internal consistency between assigning decision rights and evaluating performance while sanctioning unethical behavior must be left to top management.
D)internal consistency between assigning decision rights,evaluating performance,and sanctioning unethical behavior.

Question 7

According to Kantian theory on ethics:

A)an act is ethical if and only if it promotes the individual's long-term interests.
B)an act is ethical if it produces the greatest possible balance of good over bad for everyone affected by it.
C)only good deeds matter.
D)good deeds often result in bad outcomes.

Question 8

According to the theory of economic Darwinism,in the absence of barriers to entry,firms that survive in the long run are those that:

A)follow the most ethical practices.
B)provide productivity-based incentives to the employees.
C)deliver products consumers want at the lowest cost.
D)do not compete with other firms in the industry on quality.

Question 9

Compensating differentials for employees can be seen as one measure of adjusting for:

A)high rates of inflation.
B)problems of ethical conflict.
C)surplus labor in the unorganized sector.
D)corporate tax evasion.

Question 10

Economist Milton Friedman argued that ethical behavior followed and practiced by organizations is the same as:

A)cost minimization.
B)wealth maximization.
C)sales minimization.
D)output maximization.

Question 11

The text notes that many firms that use animals in production or advertising adopt the animal treatment standards of the American Society for Prevention of Cruelty to Animals.Why do companies adopt a professional group's standard of behavior?

Question 12

Value maximization leads to predictable resource misallocation when the firm:

A)operates in a competitive market.
B)buys inputs from a monopsonist.
C)has monopoly power in the market.
D)sets price below long-run marginal cost.

Question 13

Ethics is about making good decisions.Sometimes it is hard to see what economics has to do with ethics until you remember that economics is often defined as the:

A)science of choice.
B)key branch of theology.
C)study of market failures.
D)study of production techniques.

Question 14

Martha Stewart seems to have made a bad decision concerning the use of insider information in selling ImClone stock.The resulting negative publicity on the issue caused the value of her corporation,Martha Stewart Living,to fall by almost half.This example is supposed to show that:

A)insider trading can pay off in certain circumstances.
B)ethics and wealth creation are not linked in any way.
C)stock markets are fickle stewards of wealth.
D)ethics and wealth creation are closely linked.

Question 15

Ethics codes in corporate life tend to emphasize (a)compliance with laws and regulations,(b)honesty and integrity,and (c)avoidance of conflicts of interests.Which one is the most important in today's world? How does economics help in understanding its importance?

Question 16

Identify the correct statement regarding business ethics.

A)Business ethics seeks to proscribe those behaviors that maximize an organization's profit.
B)Business ethics and organizational architecture are independent of each other.
C)Business ethics and organizational architecture are interdependent.
D)Business ethics seeks to proscribe those behaviors that maximize an employee's productivity.

Question 17

In a situation where customers will never be seen again:

A)economies of scale are common.
B)sellers are likely to cheat on price or quality.
C)supply bottlenecks and shortages are likely to arise.
D)increased honesty in transactions is common.

Question 18

Corporate social responsibility may require changing the mission of the company to a 'constrained' wealth maximization.Is it possible for a few firms in the marketplace to shift their objective functions in this way? Why?

Question 19

The key mission that most economists ascribe to a firm's managers is to:

A)maintain ethical behavior.
B)follow all regulations.
C)maximize the value of the firm.
D)hire a large number of employees.

Question 20

What are some mechanisms for encouraging ethical behavior?

Question 21

Identity the correct statement regarding corporate culture and corporate ethics.

A)Corporate culture and corporate ethics are well understood.
B)Corporate ethics can be well articulated,but not corporate culture.
C)Corporate culture can be well articulated,but not corporate ethics.
D)Corporate culture and corporate ethics are elusive.

Question 22

Milton Friedman's view on corporate social responsibility:

A)acknowledges that shareholders may use some of their wealth for altruistic purposes.
B)assumes shareholders are not rational.
C)advocates that corporations engage in philanthropic activities.
D)applies only to U.S.corporations.

Question 23

Many businesses face the same customers over and over again.Repeat business generally:

A)increases ethical behavior toward customers.
B)reduces ethical behavior toward customers.
C)is a sign of poor product quality.
D)is the sign of a poorly run business.

Question 24

A seller-provided product warranty is often offered to a consumer to:

A)assure the latter that cheating will not occur.
B)get rid of inventory.
C)to deal with shortages of products.
D)decrease the cost of doing business.

Question 25

Informational asymmetry in constructing a contract between a buyer and a seller can lead the seller to:

A)improve the quality of the product.
B)lower the price of the product.
C)focus on ethical codes of conduct.
D)make a perfect contract.

Question 26

The expected level of shirking or opportunistic behavior by an agent:

A)can always be determined accurately.
B)is always less than zero.
C)is always zero.
D)is always greater than zero.

Question 27

Many codes of ethics attempt to alter or reinforce standards of behavior.An economist wouldn't argue with the codes but would probably note that:

A)the codes need to be universally accepted in order to be effective.
B)codes will never help under any circumstance.
C)designing an organizational architecture with proper incentives is more important.
D)the laws of supply and demand usually require that codes of ethical behavior are tertiary artifacts.

Question 28

Incentive problems in a business can lead to:

A)wealth maximization.
B)full employment of resources.
C)risk reduction.
D)ethical problems.

Question 29

Which of the following is true of warranties?

A)They are not important costs in the business world.
B)They leave contracting costs unchanged in the business world.
C)They increase contracting costs in the business world.
D)They reduce contracting costs in the business world.

Question 30

Consumer Reports and other organizations rank companies on the quality of their products and the reliability of their services.These companies provide an:

A)incentive for corporate cheating.
B)internal audit function for corporate honesty.
C)insight into the organization's mission and vision.
D)external check for corporate honesty.

Question 31

Which of the following will control incentive problems in a corporation?

A)Managers checking on their employees email and other activities closely
B)Managers forcing employees to adopt higher and stringent ethical standards
C)Managers and employees adopting predefined ethical standards
D)Managers and employees adopting higher and stringent ethical standards

Question 32

The corporate ethics problem is basically a problem of controlling:

A)CEO salaries.
B)shirking by the managers.
C)opportunism.
D)incentives.

Question 33

The Project on Corporate Responsibility launched by Ralph Nader in 1969 seeks to:

A)lower the company's legal expenses.
B)devote substantial resources to stakeholders instead of employees,customers,suppliers,and local communities.
C)make corporate management responsible for upholding a broader spectrum of democratic values.
D)reduce the company's wage bill.

Question 34

For some products,quality is virtually impossible to determine prior to purchase.If sellers of such commodities are rational,they will cheat or engage in unethical behavior only when:

A)laws allow unethical behavior.
B)the expected gains are greater than the expected costs.
C)production exhibits positive externalities.
D)the expected gains are equal to the expected costs.