Deck 19: The Theory of the Firm

Question 1

A partnership is preferable to two one- person firms:

A)if a unit of effort produces more income in a partnership.
B)because of its social benefits.
C)because two brains think better than one.
D)in all circumstances.

Answer 1

if a unit of effort produces more income in a partnership.

Question 2

Employees are sometimes compensated on the basis of a piece rate-$2.50 for each haircut for example. A piece- rate is likely to be the preferred form of compensation when the worker controls:

A)the quality of the product but not the rate of production.
B)the rate of production but not the quality of the product.
C)neither the rate of production nor the quality of the final product.
D)the rate of production and quality of the final product.

Answer 2

the rate of production but not the quality of the product.

Question 3

The owner operated team is Pareto preferred to other forms of organization if

A)members of the team do not shirk
B)there are no contracting and monitoring costs
C)workers of the residual owners
D)there are increasing returns to scale

Answer 3

there are no contracting and monitoring costs

Question 4

A partnership is Pareto preferred to a proprietorship if

A)there are increasing returns to scale
B)the law of diminishing returns is weak
C)the productivity gain associated with teen production is large enough
D)the partners are married

Question 5

Modern theories of the firm are based on the hypothesis that:

A)employees choose actions which maximize the firm's profits.
B)given any bundle of inputs, the maximum possible output is produced.
C)firms cannot recognize Pareto- preferred organizational forms.
D)employees pursue their own self- interest.

Question 6

Farms are often family owned and operated because:

A)the gains from specialization are low.
B)nature creates lots of incentives for shirking.
C)the gains from specializations are high.
D)tradition plays a strong role in agriculture.

Question 7

Which of the following resembles best real- life situations?

A)Labourers hire capitalists to produce consumer goods and services.
B)Consumers hire labourers to produce consumer goods and services.
C)Consumers never own firms.
D)Labourers never own firms.

Question 8

If partners are paid equal shares and they work independently of each other:

A)the last one to arrive has an incentive to shirk.
B)the first one to arrive has an incentive to maximize output.
C)each one has an incentive to maximize individual output.
D)each one will increase individual utility by reducing output.

Question 9

Whenever a firm chooses to buy partly finished goods as products:

A)it is using the upstream competitive markets.
B)the advantages of decentralization must have outweighed contracting costs.
C)it makes use of the benefits of centralization.
D)find coordinating activities inside the firm rather difficult.

Question 10

How can the firm secure the cooperation of its employees?

A)by providing them with incentives to advance the interests of the firm
B)by employing the "carrot and stick" approach
C)by offering them Christmas bonuses and annual cruises
D)by threatening them

Question 11

Small firms survive in some industries because:

A)the owner usually knows the workers by name.
B)the gains from specialization are high.
C)the incentives to shirk are low.
D)the cost of monitoring employees is low.

Question 12

The organizational structure of the farm has changes over time because:

A)there is a clear trend towards urbanization.
B)the gains from team production started to outweigh the monitoring costs.
C)the governments intervened in agricultural production.
D)agricultural workers get more schooling nowadays.

Question 13

The firm is:

A)the sum of the buildings, the machineries, and the workers producing the output.
B)the name of a famous movie.
C)the set of contracts that determines who the owners are.
D)a black box that transforms input into outputs.

Question 14

The former communist countries organized their economies as one big firm: there was no role for the market, all decisions were administrative ones. The fact that these countries are reverting to the market means that:

A)the incentives in those economies were such that the wealth- creation process suffered.
B)these countries lack imagination.
C)communism was not given a fair chance.
D)globalization is showing its ugly head in these parts of the world.

Question 15

The partnership as an organization structure is flawed because:

A)no partner can capture the whole output his effort creates.
B)people tend not to be honest.
C)courts are inefficient.
D)private incentives bring out the worst in people.

Question 16

Team production refers to:

A)situations in which the marginal products of each worker are unobservable.
B)situations in which the marginal products of each worker are zero.
C)output on sports teams.
D)when the marginal product of one worker influences the marginal product of another.

Question 17

Which of the following is not a generic input?

A)plastic grocery bags used by Safeway
B)flour used by bakeries
C)aluminum used by Norco to build mountain bikes
D)the mouse used with a computer

Question 18

The theory of the firm:

A)studies the organizational aspects of the firm.
B)is concerned with profit maximization.
C)uses a black- box description for the firm.
D)studies the intricacies of how much a firm produces.

Question 19

The maximum size of a firm is determined by:

A)the transactions costs of coordination in the market.
B)the cost of capital versus the cost of labour.
C)the transaction costs of internal coordination.
D)the cost of performing functions in house versus the cost of letting the market perform the function.

Question 20

A nonprofit firm:

A)separates the control of the firm from management.
B)separates the control of the firm from the residual claimant.
C)does not earn a profit.
D)separates the control of the firm from the workers.

Question 21

In the case of farming,

A)the team production can play a significant role if nature can be removed from the equation.
B)the role played by nature always outweighs that of team production.
C)the role played by nature always outweighs that of specialization.
D)the role of specialization and team production always outweigh that of nature.

Question 22

Which of the following is not a structure firms take?

A)the owner- managed firm
B)the publicly held firm
C)the hierarchy
D)the partnership

Question 23

In the publicly held firm:

A)patterns of ownership and control are centrally defined.
B)owners and managers are different groups.
C)control is delegated to the owners alone.
D)managers are hired directly by the owners.

Question 24

It is not true that specific inputs are:

A)common in the manufacture of consumer goods.
B)useful to a small number of firms.
C)often produced by the firm which uses them.
D)never produced by the firm which uses them.

Question 25

The separation between ownership and control:

A)characterizes the nonprofit firms.
B)is present in both nonprofit firms and large corporations, but for a different reason.
C)characterizes large corporations.
D)was invented to confuse MBA students.

Question 26

when monitoring costs are high and team productivity is high the Pareto preferred organizational form is

A)partnership
B)owner managed team
C)one person firm
D)labor managed team

Question 27

Modern theories of the firm:

A)assume that a second best equilibrium will be attained.
B)suppose a Pareto- optimal organizational form will be chosen.
C)prove that a Pareto- optimal organizational form cannot be chosen because of high transaction costs.
D)are not concerned with Pareto optimality.

Question 28

Successful firms depend on:

A)individual self interest.
B)disinterested cooperation.
C)teamwork or specialization.
D)managerial diligence.

Question 29

Specialization within firms has all of the following advantages except:

A)decreased setup costs.
B)increased knowledge of consumer preferences.
C)decreased monitoring costs.
D)increased productivity through learning by doing.

Question 30

Compared to specific inputs, generic inputs are:

A)less likely to be purchased from other firms.
B)less costly than specific inputs.
C)more costly than specific inputs.
D)more likely to be purchased from other firms.

Question 31

In order to maximize profits the firm chooses organizational forms that allow:

A)shareholders a say in operations.
B)owners to run the firm.
C)individual incentives to match with firm objectives.
D)the firm to charge the highest prices.

Question 32

The structure of a firm will depend on:

A)the size of market transaction costs only.
B)the level of corporate taxes.
C)the size of internal coordination costs only.
D)the nature of the traditions, customs, and work habits of workers.

Question 33

A theory of the firm:

A)must explain why firms go bankrupt.
B)must come up with other reasons to exist other than profit maximization.
C)needs to account for the diversity and complexity observed within the real- life firm.
D)is an account of how a group of individuals having a common goal can succeed.

Question 34

An fixed wage employee who is able to shirk:

A)will be fired if caught.
B)shows in a subtle way that she is also a residual claimant.
C)proves that the firm is too big for its own good.
D)operates in a world of zero transaction costs.

Question 35

A firm is:

A)a black box.
B)a collection of economic assets.
C)a group an individuals with a common goal.
D)a collection of contracts between different parties.

Question 36

when monitoring costs are high and team productivity is low the Pareto preferred organizational form is

A)one person firm
B)owner managed team
C)partnership
D)labor managed team

Question 37

Efficient team production depends on:

A)good will by individual team members.
B)careful selection and training.
C)efficient resource use planning.
D)monitoring individual activity.

Question 38

At the equilibrium of the one- person firm, the MRS of income for effort is:

A)zero.
B)not defined.
C)one.
D)infinity.

Question 39

The separation of control and ownership:

A)is minor issue in the study of organizations.
B)sits rarely at the core of most corporate scandals.
C)is not a big concern for Canadian firms.
D)is a mixed blessing.

Question 40

In the absence of contracting or monitoring costs, the owner- operated team is:

A)Pareto- preferred to both the one person firm and the partnership.
B)Pareto- preferred to the one person firm.
C)Pareto- preferred to the partnership.
D)Pareto- preferred to large firms.

Question 41

In a one- person firm:

A)ability determines effort.
B)income depends on effort.
C)financing depends on credit.
D)effort is restricted by resources.

Question 42

Asymmetric information and uncertainty:

A)are key for the understanding of the firm as an organization.
B)are important aspects in the neoclassical approach of the firm.
C)are not as prevalent today compared to a few decades ago.
D)indicate that transaction costs are not significant.

Question 43

Ownership is equivalent to:

A)being the largest customer of a firm by far.
B)being an employee in a firm.
C)holding moral rights.
D)having residual claims in the firm.

Question 44

Adam Smith's fundamental insight was that firms were more productive when:

A)labour was specialized.
B)hamburgers are grilled rather than broiled.
C)organized as monopolies.
D)each worker does all parts of a project.

Question 45

Jack has one half of a $10,000 bill and Jill has the other half. By itself neither half is worth anything but together the two are worth $10,000. Which of the following is true?

A)Neither would ever offer less than $5,000 for the other half.
B)Neither is likely to accept an offer for much less than $5,000.
C)Neither would ever accept less than $5,000 for their half.
D)Each half is a specific input into the production of a $10,000 bill.

Question 46

Firms are least likely to use markets for:

A)specific inputs.
B)generic outputs.
C)specific outputs.
D)generic inputs.

Question 47

Examples of partnerships include:

A)small firms.
B)marriages but not law firms.
C)law firms.
D)restaurants but not marriages.

Question 48

Corporations can be:

A)private or governmental.
B)private but not public.
C)public but not private.
D)private or mixed.

Question 49

There are three types of corporations:

A)public, private, and governmental.
B)public, private, and mixed.
C)public, private, and nonprofit.
D)public, private and family.

Question 50

The internal organization of firms depends on:

A)owners' convenience.
B)their objectives.
C)state law.
D)corporate charters.

Question 51

Imagine two workers each expending a fixed amount of effort for one period, and let y denote aggregate output when they labour separately and x denote aggregate output when they work together. Which of the following statements is true?

A)If y exceeds x, the workers will not work as a team.
B)If x is equal to y, the workers will work as a team.
C)If x exceeds y, the workers will work as a team.
D)If x exceeds y, the workers will not work as a team.

Question 52

Wage rates in many industries are positively correlated with seniority-the longer the worker has been with the firm, the higher is the worker's wage rate. Seniority based wage rates:

A)can be interpreted as piece rate compensation.
B)are valuable when workers get better at their jobs with experience.
C)are only observed in unionized firms.
D)are never a Pareto- optimal form of compensation.

Question 53

There are so few .400 hitters in baseball now than 75 years ago because:

A)the rules of the games put batters at a disadvantage now.
B)there is more specialization in the outfield than there used to be.
C)baseball players are not as good as they used to be.
D)baseball players are paid too much now.

Question 54

The following are potential owners of a firm:

A)managers, consumers, but not suppliers.
B)suppliers, workers, but not consumers.
C)workers, consumers, but not suppliers.
D)suppliers, workers, and consumers.

Question 55

Team production raises organizational issues which do not arise in a one- person firm because in teams:

A)self interest reduces production.
B)individual behaviour must be monitored.
C)the firm and employee have the same objectives.
D)compensation schemes must recognize self- interests.

Question 56

Public corporations:

A)are characterized by dispersed ownership.
B)are own by the public through the government.
C)are characterized by concentrated ownership.
D)are subject to public scrutiny.

Question 57

Large factory- like firms survive because:

A)the ability to shirk is low.
B)they are usually public companies.
C)the gains from specialization are high.
D)the cost of monitoring is low.

Question 58

The division of labour:

A)reduces the level of transaction costs significantly by simplifying production.
B)is efficient because it leads to technical progress.
C)increases productivity by reducing work to ordinary, dull activities.
D)increases efficiency by requiring people to use long periods of time to work on one task.

Question 59

A firm is best thought of as:

A)a group of individuals pursuing their own self- interest in a coordinated fashion.
B)a group of individuals pursuing their own self- interest.
C)a group of individuals pursuing the public interest.
D)a group of individuals pursuing the interest of the firm.

Question 60

Which of the following is the best example of a customer- owned firm?

A)Costco
B)Via Rail
C)MasterCard
D)Chrysler

Question 61

A good example of a residual claimant is:

A)a consumer.
B)an worker on a fixed wage.
C)a stockholder.
D)an executive who doesn't earn bonuses when firm is doing well.

Question 62

An owner- operator firm is where:

A)the owner is the only worker on the premises.
B)the one who directs resources is the sole residual claimant.
C)the one who directs resources is hired by stockholders.
D)the owner can force workers to do what he wants.

Question 63

A residual claimant is:

A)a waste disposal expert.
B)the last person to be paid.
C)an owner- manager.
D)a disgruntled employee.

Question 64

Industries with large monitoring costs are likely to find that the Pareto- preferred structure is a:

A)mixture of corporate structures.
B)one- person firm.
C)multiperson firm.
D)partnership.

Question 65

Multiperson firms exist to reduce all of the following costs except:

A)legal.
B)transactions.
C)monitoring.
D)contracting.

Question 66

In a two- person firm where both people are equally skilled, their collective income is most likely to be:

A)approximately twice their income in two one- person firms.
B)exactly twice their income in two one- person firms.
C)more than twice their income in two one- person firms.
D)less than twice their income in two one- person firms.

Question 67

when monitoring costs are low and team productivity is high the Pareto preferred organizational form is

A)labor managed team
B)partnership
C)owner managed team
D)one person firm

Question 68

Rosy Flour is a firm which produces flour from wheat. The output of Rosy Flour is:

A)not an input to other firms.
B)a specific input for other firms.
C)a generic input for other firms because many firms use some flour.
D)a generic input for other firms because all firms use some flour.

Question 69

Which of the following describes best a firm in which labourers hire capitalists?

A)a pharmaceutical company.
B)a book- of- the month club
C)a big car manufacturer
D)a law firm

Question 70

In the case of specific inputs:

A)the firm producing the input is in a precarious bargaining position.
B)coase theorem does apply.
C)the firm buying the inputs is in a precarious bargaining position.
D)special contractual protection is not needed.

Question 71

The central question the organizational structure of the firm has to answer is:

A)how to best align the individual self- interest with the firm interests.
B)how to increase the values of the shares.
C)how to increase profits.
D)how to acquire the largest market share.

Question 72

In the case of low team productivity and high monitoring costs:

A)a one- person firm is Pareto- preferred to partnerships.
B)there are no advantages for any organizational type.
C)an owner- managed firm is preferred to partnerships.
D)an owner- managed firm is preferred to a one- person firm.

Question 73

The choice of producing within firms or across markets

A)is based on the magnitude of production costs only.
B)is based on the magnitude of transaction costs only.
C)depends to a large degree on the size of the firm.
D)will depend on the relative costs of the two options.

Question 74

Transaction costs are:

A)the costs associated with coordination inside the firm.
B)the cost associated with coordination outside the firm.
C)total costs plus production costs.
D)total costs less production costs.

Question 75

The central hypothesis of the theory of the firm is that the firm chooses an organizational form that maximizes profits:

A)given capital requirements.
B)net of operating costs.
C)given market prices.
D)net of any transactions costs.

Question 76

An input is specific, as opposed to generic if:

A)many firms use the specified input.
B)one firm uses the specified input.
C)no firms use the specified input.
D)all firms use the specified input.

Question 77

If our theory of the firm suggests that joint production is more efficient than individual production and that firms exist as a solution to the maximization problem, which of the following is inconsistent with that theory?

A)specialization and division of labor
B)shirking
C)decreasing returns to scale
D)transaction costs

Question 78

In the modern theory of the firm, an important difference between individuals and firms is that firms are:

A)producers.
B)not natural entities.
C)characterized by a production function.
D)employers.

Question 79

Team production and specialization both share one important feature in common because both are potentially more productive, both may account for the existence of firms. However there are important differences; which of the following is among them?

A)It is easier to evaluate individual productivity in teams.
B)It is easier to evaluate individual productivity in specialization.
C)Team production must be conducted in one firm.
D)It is easier to evaluate team than individual productivity.

Question 80

Deferred compensation is an aspect of many employment contracts. For example, workers sometimes receive a bonus for staying with the firm for some specified period of time. In which of the following situations is deferred compensation likely to be a feature of the employment contract?

A)The firm incurs little cost when it hires a new worker.
B)It takes new workers a considerable time to learn the job.
C)The work is routine and involves no learning on the job.
D)The work is extremely distasteful.