ECON 5030 - A firm deciding to hire a secretary bases

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QUESTION 4

A firm deciding to hire a secretary bases its decision on how well the candidate is trained on certain software. This practice addresses:

a. Adverse selection

b. Moral hazard

c. Forced bankruptcy

d. None of the above

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QUESTION 8

A shoe salesman working on commission must decide whether to work hard or shirk. Working hard would increase the probability of a sale from 20% to 70% but would cost him $5. If the average price of shoes is $100, what is the minimum commission rate would induce him to work hard?

a. 4%

b. 6%

c. 8%

d. 10%

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QUESTION 9

The following is NOT an example of a potential monitoring solution to moral hazard

a. a pre-hire typing test for clerical employees

b. closed circuit TVs throughout a warehouse

c. GPS tracking devices in repair trucks

d. listening in on call center conversations

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QUESTION 11

Smart Sam can make a $200 investment that grows to $1,000 50% of the time and becomes a total loss 50% of the time. What is his expected return on the investment?

a. $200

b. $300

c. $400

d. $500

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QUESTION 13

Banks are more willing to lend money to those who have a sizable amount of their own money at risk because

a. They like lending to individuals who usually don’t need the money

b. Those with their own money at risk are more likely to only propose viable projects to the bank.

c. Borrowers with their own capital invested are more likely to make payments on any loan that is made.

d. Both B & C

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QUESTION 15

To incentivize emplyees

a. Measure performance, whether formally or informally

b. Tie the performance metrics to compensation

c. All of the above

d. None of the above

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QUESTION 17

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

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QUESTION 22

An incentive compensation scheme includes

a. a performance evaluation system

b. a disciplinary action committee

c. a reward system linked to performanc

d. Both A & C

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QUESTION 24

If a car salesman is paid a fixed commission when he sells a car, the owner is most likely to see

a. Large margins on sales

b. Low margins on sales

c. No sales

d. None of the above

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QUESTION 25

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

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QUESTION 27

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

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QUESTION 29

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

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QUESTION 30

Sales agents being paid a fixed commission on the sales are more likely to

a. Tell their bosses that they need to price higher to make sales

b. Tell their bosses that they need to price lower to make sales

c. Not say anything to their boss

d. None of the above

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QUESTION 31

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 maker should be enhanced

c. the incentive structure for the decision maker should be strengthened

d. incentive compensation at the periphery can be weakened

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QUESTION 32

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

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QUESTION 33

An industrious franchisee will

a. Always be outbid by lazy ones for the right to run a franchised restaurant

b. Always outbid the lazy ones for the right to run a franchised restaurant

c. Never outbid the lazy ones for the right to run a franchised restaurant

d. None of the above

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QUESTION 34

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?

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QUESTION 35

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 36

The manager of Fatty Foods is thinking about retiring. He has two options: to leave his stores as a company stores, to be managed by a salaried manager, or to sell some of them as franchises. The franchisor however is offering a really low franchisor fee for the store. What would be his best bet?

a. Let the stores stay company stores

b. Sell them off as franchises

c. Shut down the business completely

d. Never retire

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QUESTION 37

Sharing contracts in franchising is when

a. The franchisor pays a fixed franchisor fee

b. The franchisor pays a percentage of the revenue or profit of the restaurant

c. The franchisor fee is decreased to 50%

d. The franchise gets to share the franchise fee with other restaurants

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QUESTION 38

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

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QUESTION 39

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

a. Prinpipal

b. Agent

c. Both of the above

d. None of the above

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QUESTION 40

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

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QUESTION 41

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 42

A problem with using the price of a product similar to the intermediate good sold on the market is

a. the market price includes a margin above marginal cost

b. the product on the market may include costly features your downstream division does not use

c. the product on the market may be cheap because it is not as high of quality as your downstream division uses

d. all of the above

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QUESTION 43

Tom & Jerry are running Hanna Barbera’s lemonade stand as two profit centers. Tom makes the lemonade while Jerry sells it. Jerry argues that Tom is transferring the lemonade to him priced too high, which forces him to charge the customers a high price, losing sales. Who is making the bad decision?

a. Tom

b. Jerry

c. Hanna Barbera

d. None of them

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QUESTION 44

A cost center is

a. evaluated based on minimizing costs within the division

b. evaluated based on maximizing costs within the division

c. evaluated based on minimizing profits generated by the division

d. evaluated based on maximizing profits generated by the division

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QUESTION 45

A profit center is

a. evaluated based on minimizing costs within the division

b. evaluated based on maximizing costs within the division

c. evaluated based on minimizing profits generated by the division

d. evaluated based on maximizing profits generated by the division

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QUESTION 46

In profit centers

a. Managers are easy to evaluate because there is a simple metric of how well they performed

b. Managers typically do not have the information to run their division efficiently

c. Managers' decisions rarely affect other divisions

d. Managers typically do not have the incentives to run their division efficiently

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QUESTION 47

Which of the following is FALSE?

a. Maximizing division profits always leads to maximizing company-wide profits

b. Managers of profit centers are usually given a lot of discretion in their decision making

c. Profit centers usually largely run themselves

d. A manager being rewarded on division revenues has the most incentive to make good decisions for his division

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QUESTION 48

When a transfer price increases

a. the profits of the division producing the intermediate product will rise

b. the profits of the division producing the intermediate product will fall

c. the costs of the division producing the intermediate product will rise

d. the costs of the division producing the intermediate product will fall

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QUESTION 49

An advantage of a functional division is that performance is

a. More easily measured

b. More difficult to measure

c. Not measured

d. None of the above

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QUESTION 50

Tom & Jerry are running Hanna Barbera’s lemonade stand as two profit centers. Tom makes the lemonade while Jerry sells it. Jerry argues that Tom is transferring the lemonade to him priced too high, which forces him to charge the customers a high price, losing sales. Does the decision maker have the information to make a good decision?

a. Yes

b. No

c. Uncertain

d. None of the above

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QUESTION 51

The major problem with running a functionally organized firm is

a. Measuring division's performance

b. Tying pay to performance

c. Ensuring that the functional divisions are working towards a common goal

d. All of the above

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QUESTION 52

Conflicts can arise between divisions because

a. Coordination between divisions does not benefit all divisions equally

b. managers of profit centers care too little about the effects of their decisions on other divisions

c. managers are rewarded only for actions that increase their own divisional profit regardless of their effects on other divisions

d. all of the above

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QUESTION 53

Ways to "game" the budgeting process include

delaying sales if just short of a target

accelerating expenses if just short of a target

delaying sales once a target is met

delaying expenses costs once a target is met

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QUESTION 54

Which of the following is a reason there are divisional conflicts over the transfer price?

a. the manager of the upstream division prefers a transfer price that is too high

b. the manager of the downstream division prefers a transfer price that is too low

c. the corporate headquarters does not have enough information to determine the correct transfer price

d. all of the above

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QUESTION 55

Managers of profit centers usually have

a. A lot of discretion over decisions

b. Most of their decisions overseen by corporate executives

c. No discretion over decisions

d. Given excessively high bonuses

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QUESTION 56

Once a division manager sees that production goal for a time period is likely to be met

a. he has an incentive to increase the pace of production

b. he has an incentive to decrease the pace of production

c. he does not have an incentive to change the pace of production

d. he has an incentive to produce other products

QUESTION 57

Which of the following can be a solution to the “free riding problem” by discount retailers?

a. Awarding retailers exclusive territories

b. Setting minimum prices for items sold by such specialty retailers

c. All of the above

d. None of the above

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QUESTION 58

Antitrust enforcement of vertical relationships is generally focused on

a. The dominant firm using vertical contracts to extend market power to other levels of the supply chain

b. Vertical contracts that reduce the intensity of competition

c. Vertical contracts that harm consumers

d. All of the above

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QUESTION 59

Vertical contracts that aim to decrease retailer prices typically

a. Benefit the consumer and the manufacturer but hurt the retailer

b. Benefit the manufacturer and retailer but hurt the consumer

c. Benefits the consumers, manufacturers and retailers

d. Hurts all the manufacturers, consumers and retailers

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QUESTION 60

Double markup problems arise when

a. upstream firms have market power

b. downstream firms have no market power

c. upstream and downstream products are unrelated in demand

d. upstream and downstream firm's pricing decisions tend to increase the demand for the other product

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QUESTION 61

A pharmaceutical company faces a price regulation where it cannot charge any higher than $5,000 for a lifesaving drug. The company knows that the patients put a high value on this product and are willing to pay up to $10,000 for it. The company will likely

a. Not do anything-it is prohibited by law to increase its price

b. Bundle the drug with periodic blood testing, selling the bundle for $10,000

c. Require that the patients have the drug administered by the company’s medical staff, for an additional $5,000

d. Both B & C

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QUESTION 62

Vertical contracts between manufacturers and retailers often aim to

a. Prevent the retailers from defeating upstream price discrimination through arbitrage

b. Reward the manufacturer for undertaking the risk inherent in introducing a new product

c. Serve as a “signal” of the retailer’s belief of the likely success of his product

d. All of the above

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QUESTION 63

Mechanisms that manufacturers can use to deal with misaligned retailer incentives include

a. setting a minimum retail price

b. providing an exclusive contract to a single retailer in a market

c. compensating retailers’ sales staff for demonstrating, as well as selling, the product

d. all of the above

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QUESTION 64

Coco chocolate manufacturers recently decided to “gift” one of its retailers a refrigerator. Why would it want to do that?

a. To ensure the retailer knowledge of their generosity

b. To ensure the retailers knowledge of their quality

c. To ensure the freshness of the product that reaches their consumers

d. To ensure the retailers decrease in price

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QUESTION 64

A pharmaceutical company faces a price regulation where it cannot charge any higher than $5,000 for a lifesaving drug. The company knows that the patients put a high value on this product and are willing to pay up to $10,000 for it. The company decides to sell the drug at $5,000 but requires the patients to purchase periodic blood testing from them for $5,000. This is an example of

a. Tying

b. Bundling

c. Fraud, the company is not allowed to sell for any higher than the regulatory price

d. Both A & B

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QUESTION 66

Vertical contracts between manufacturers and retailers often aim to

a. Incentivize the manufacturers to undertake costly activities, which they otherwise may not realize the full benefits of on their own

b. Reward the manufacturers for undertaking the risk inherent in introducing a new product

c. Serve as a “signal” of the manufacturer’s belief of the likely success of his product

d. All of the above

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QUESTION 67

Vertical contracts generally run ______the goals of the customers

a. Indifferent to

b. In line with

c. Contrary to

d. None of the above

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QUESTION 68

Which of the following is TRUE?

a. Discount retailers can defeat price discrimination by the manufacturers through arbitrage

b. Arbitrage is not an effective way for retailers to defeat price discrimination by manufacturers

c. Retailers are incapable of defeating upstream price discrimination once the manufacturer sets prices

d. “High End” retailers can defeat price discrimination by the manufacturers through arbitrage

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QUESTION 69

Harry’s HVAC sells its new units bundled with after sales service. Why would it want to do that?

a. To ensure that the customer knows that they are stuck with Harry’s service technicians

b. To ensure that only the highest paid personnel get to service the units

c. To ensure that the customers do not buy second-class servicing and then infer faulty design if a unit breaks down due to inadequate service

d. All of the above

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QUESTION 70

Which of the following is TRUE?

a. Purchase a supplier as long as the supplier is profitable

b. Purchasing a profitable customer would lead to an increase in profits

c. Purchasing a profitable supplier may not necessarily increase your profits

d. Purchasing a profitable supplier is a bad idea and would lead to decreased profits

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QUESTION 71

Vertical relationships can increase profits through

a. preventing firms from evading regulation

b. eliminating a double-markup problem

c. making the incentives of manufacturers and retailers unaligned

d. preventing price discrimination

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QUESTION 72

Retailers do not find it profitable to engage in promotional activities because

a. They reap the full benefits of the promotion

b. They do not have to share the benefits of the promotion with the manufacturer

c. They are wary of competing retailers’ ability to “free ride” on their efforts

d. All of the above

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QUESTION 73?

1. If your supplier becomes more profitable

a. you become more profitable by acquiring it

b. you become less profitable by acquiring it

c. acquiring it will make you more profitable if there are no synergies to exploit

d. unless there are synergies to exploit through acquisition, acquiring it will not make you more profitable