Question 1

Which of the following is true of implicit contracts?

Accepted Answer

A)  Enforcement depends on the private incentives of individuals.
B)  Agents do not act in the best interest of principals.
C)  The gains from trade are low and there are market failures.
D)  The opportunity cost of residual loss is low. A

Question 2

Which one of the following is a source of conflict between owners and managers?

Accepted Answer

A)  Managers and owners have a very short time horizon.
B)  Managers and owners worry about the entire future cash flows.
C)  Managers have short time horizons,while owners have to worry about future cash flows.
D)  Owners have short time horizons,while managers have to worry about future cash flows. C

Question 3

It is in the interest of all parties to develop efficient solutions to agency problems through ______ so that more wealth can be shared among the contracting parties.

Accepted Answer

A)  adverse selection
B)  value maximization
C)  contracting until marginal benefit (M
B)  equals zero
D)  implicit contracts B

Question 4

You want to hire a law firm to represent you from which you derive benefit.The law firm incurs costs from providing this service.As long as marginal benefits are greater than marginal costs,value is:

Accepted Answer

A)  minimized.
B)  not maximized because more hours of services are provided.
C)  not maximized because fewer hours of services are provided.
D)  maximized.

Question 5

A pilot for a private jet stops for refueling in Omaha,Nebraska.Topper Fuels offers him a case of French wine to refuel with them (a total retail value of $324 to the pilot).For refueling,inspections,and minor repairs,Topper charges $2,700,$400 more than the least expensive fuel company.What has happened to the company that owns the private jet?

Accepted Answer

The answer of A pilot for a private jet stops...

Question 6

The firm or corporation is the focal point for:

Accepted Answer

A)  a set of contracts.
B)  the interaction of demand and supply.
C)  dealing with asymmetric information.
D)  value minimization.

Question 7

Adverse selection in bargaining arises from:

Accepted Answer

A)  signaling private information to other parties.
B)  self-selection based on private information.
C)  implicit contracts between the principal and the agent.
D)  asymmetric information held by the principal or the agent.

Question 8

Often people in business work in teams,each using specialized knowledge to get the tasks done.If one member of the team does no work,this is called:

Accepted Answer

A)  signaling
B)  bargaining
C)  free-riding.
D)  costless contracting

Question 9

J.T.Smith runs Gamemaker,an equipment producer for gaming service corporations.As CEO,Smith is seemingly worth $2.5 million per year in the marketplace.The directors are attempting to decide how to divide his compensation package between cash salary and perquisites.Using budget constraints and indifference curves,illustrate the potential outcomes for the board of directors.

Accepted Answer

The answer of J.T.Smith runs Gamemaker,an equipment producer for gaming...

Question 10

Which one of the following is a source of conflict between owners and managers?

Accepted Answer

A)  A manager's effort leaves the firm's value and the manager's utility unchanged.
B)  A manager's effort decreases the firm's value and the manager's utility.
C)  A manager's effort increases the firm's value but decreases the manager's utility.
D)  A manager's effort increases the firm's value and the manager's utility.

Question 11

Using piece rates for employees in an assembly line usually increases ________,but it may reduce ________.

Accepted Answer

A)  output; quality
B)  costs; revenue
C)  quality; output
D)  revenue; costs

Question 12

In an agency relationship,the costs incurred by agents to ensure that a principal is compensated if they take any action that is detrimental to the principal is known as:

Accepted Answer

A)  monitoring costs
B)  bonding costs
C)  recurring losses
D)  residual losses

Question 13

Always Round Tire hires Plain Truth Advertising to write copy for its newspaper advertisements.Always Round has a demand for advertising of MB = 400 − 2S where S is the number of hours that Plain Truth works.If Plain Truth has a fixed supply cost given by MC = $150 per hour,what are the number of hours that Always Round purchases from Plain Truth? Now,if the copy writers are slackers and only deliver 100 hours of work each week,and if the each company must spend $1,250 in monitoring and bonding costs,what is the surplus and residual loss in this environment?

Accepted Answer

The answer of Always Round Tire hires Plain Truth Advertising...

Question 14

J.T.Smith's company,Gamemaker,sells gambling equipment to gaming service companies.Since the quality of the equipment is difficult to monitor and gamblers are often the source of machine failure,Smith could cheat on the level of machine quality.However,Smith has a strong quality assurance program.A primary reason for that may be:

Accepted Answer

A)  cost containment.
B)  company reputation.
C)  the need for reinforcement.
D)  the asymmetric information Smith holds on quality.

Question 15

Markets use prices to allocate resources,while firms use:

Accepted Answer

A)  cost-price ratios.
B)  managers.
C)  the board of directors.
D)  random decisions.

Question 16

What is an agency relationship? What are agency problems?

Accepted Answer

The answer of What is an agency relationship? What are...

Question 17

______ can provide incentives to honor implicit contracts.

Accepted Answer

A)  Value maximization
B)  Adverse selection
C)  Reputational concerns
D)  Bargaining power

Question 18

One of the ways of overcoming the problem of adverse selection is through:

Accepted Answer

A)  signaling.
B)  bargaining.
C)  free-riding.
D)  costless contracting.

Question 19

While CEO of General Electric,Jack Welch was a very successful corporate manager,he also loaded up his retirement program with numerous unusual benefits such as rented apartments,free airplanes,and numerous club memberships.The owners (stockholders)were generally unaware of these benefits.The source of conflict between owners and managers in this case was:

Accepted Answer

A)  the choice of effort of Mr.Welch while he was CEO.
B)  perquisite taking on the part of Mr.Welch.
C)  differential risk exposure between Mr.Welch and the typical stockholder.
D)  overinvestment in company offices by Mr.Welch.

Question 20

Which one of the following is a source of conflict between owners and managers?

Accepted Answer

A)  Managers and owners are both highly risk-averse.
B)  Managers and owners are both risk-takers.
C)  Managers are more risk-averse whereas owners are not.
D)  Managers are less risk-averse whereas owners are not.

Exam 10: Incentive Conflicts and Contracts

Which of the following is true of implicit contracts?

Which one of the following is a source of conflict between owners and managers?

It is in the interest of all parties to develop efficient solutions to agency problems through ______ so that more wealth can be shared among the contracting parties.

You want to hire a law firm to represent you from which you derive benefit.The law firm incurs costs from providing this service.As long as marginal benefits are greater than marginal costs,value is:

The firm or corporation is the focal point for:

Adverse selection in bargaining arises from:

Often people in business work in teams,each using specialized knowledge to get the tasks done.If one member of the team does no work,this is called:

Which one of the following is a source of conflict between owners and managers?

Using piece rates for employees in an assembly line usually increases ,but it may reduce .

In an agency relationship,the costs incurred by agents to ensure that a principal is compensated if they take any action that is detrimental to the principal is known as:

Markets use prices to allocate resources,while firms use:

What is an agency relationship? What are agency problems?

______ can provide incentives to honor implicit contracts.

One of the ways of overcoming the problem of adverse selection is through:

Which one of the following is a source of conflict between owners and managers?