Question 1

One possible solution to an incentive problem arising under unobservable actions is:

Accepted Answer

A) to pay more and make the worker efficient. 
B) to be the boss and fire the inefficient worker and send a signal to others. 
C) to buy the agent's right to his total output. 
D) to sell the agent the right to the total production. 
A) to pay more and make the worker efficient. 
B) to be the boss and fire the inefficient worker and send a signal to others. 
C) to buy the agent's right to his total output. 
D) to sell the agent the right to the total production.

Question 2

Some industrial psychologists suggest that,"pay is not a motivator".How do they support the argument and what are the limitations of that argument?

Accepted Answer

To support this view,it is pointed out t

Question 3

The DuPont case is a good example of an incentive package gone awry.In review,it placed a portion of employee's pay into an "at-risk pool." If the division had exceeded expectations,the employees would have received a bonus from the pool.How would a "relative performance contract" have saved the DuPont bonus system?

Accepted Answer

DuPont could have benchmarked its divisi

Question 4

A compensation program that includes all performance indicators that influence an employee's effort is called the:

Accepted Answer

A) informativeness principle. 
B) incentive coefficient. 
C) risk-sharing premium. 
D) efficient bargaining solution. 
A) informativeness principle. 
B) incentive coefficient. 
C) risk-sharing premium. 
D) efficient bargaining solution.

Question 5

Compared to owners,employees receive a large fraction of their incomes from their employers and are consequently dependent on the fortunes of that company in the marketplace.From a 'risk-sharing' perspective,an employee tends to prefer:

Accepted Answer

A) a flat salary. 
B) output-based incentive pay. 
C) year-end based performance pay. 
D) commission-based incentive pay. 
A) a flat salary. 
B) output-based incentive pay. 
C) year-end based performance pay. 
D) commission-based incentive pay.

Question 6

The basic incentive problem is that owners and employees:

Accepted Answer

A) are both concerned about sales maximization. 
B) have fundamentally different objectives. 
C) need government assistance to solve differences. 
D) generally operate in perfectly competitive markets. 
A) are both concerned about sales maximization. 
B) have fundamentally different objectives. 
C) need government assistance to solve differences. 
D) generally operate in perfectly competitive markets.

Question 7

Consider the salary of Mary Sue Nelson,a sales agent for Plain Truth Advertising.Her wage package is ,where Q is her dollar volume of sales.Her productivity is ,where e denotes her hours of effort and µ is a random variable with mean 0.She has an effort cost of C = e2.Under this contract,the expected value of her total wages will be:

Accepted Answer

A) $200.00. 
B) $1,000.00. 
C) $3,060.00. 
D) $4,200.00. 
A) $200.00. 
B) $1,000.00. 
C) $3,060.00. 
D) $4,200.00.

Question 8

Three difficulties that limit the usefulness of ownership in resolving incentive problems are:

Accepted Answer

A) wealth constraints,free-riding,and bundling. 
B) risk aversion,free-riding,and conflict of interests. 
C) wealth constraints,risk aversion,and bundling. 
D) wealth constraints,risk aversion,and free-riding. 
A) wealth constraints,free-riding,and bundling. 
B) risk aversion,free-riding,and conflict of interests. 
C) wealth constraints,risk aversion,and bundling. 
D) wealth constraints,risk aversion,and free-riding.

Question 9

Incentives are not likely to pose a problem:

Accepted Answer

A) as long as employers can exploit the employees. 
B) if the interests of the employees and the employers conflict somewhat. 
C) if the interests of the employees and the employers conflict. 
D) if the interests of the employees and the employers are perfectly aligned. 
A) as long as employers can exploit the employees. 
B) if the interests of the employees and the employers conflict somewhat. 
C) if the interests of the employees and the employers conflict. 
D) if the interests of the employees and the employers are perfectly aligned.

Question 10

Use the following example to review the basic incentive problem in the owner/ employee conflict.Assume perfect contracting possibilities.Chef Tom Malone is the key employee for FancyFoods.His utility is defined by
U = I - e2 and his reservation wage is $2,000 per week.
FancyFoods costs = Malone's wages = $2,000 + e2
FancyFoods benefits = revenue = 300e
Profits = Revenues - Costs
Compute the optimal wage bill for Chef Malone,the revenues for FancyFoods,and the profits earned by FancyFoods.

Accepted Answer

The firm will offer the chef a compensat

Question 11

The text quotes W.Edwards Deming as saying that "pay is not a motivator." The history of incentive pay plans shows that:

Accepted Answer

A) they rarely work. 
B) incentives work in every instance. 
C) there is a mixed record in success of incentive pay plans. 
D) incentives must be non-monetary to work. 
A) they rarely work. 
B) incentives work in every instance. 
C) there is a mixed record in success of incentive pay plans. 
D) incentives must be non-monetary to work.

Question 12

Alfie Kohn and Demming are of the opinion that:

Accepted Answer

A) pay is a prime motivator. 
B) work place and environment are not important motivators. 
C) pay is not a motivator. 
D) incentive plans all work too well. 
A) pay is a prime motivator. 
B) work place and environment are not important motivators. 
C) pay is not a motivator. 
D) incentive plans all work too well.

Question 13

The rate at which an employer provides an incentive for an employee to perform (to increase effort)is the:

Accepted Answer

A) informativeness quotient. 
B) incentive coefficient. 
C) risk-sharing premium. 
D) efficient bargaining solution. 
A) informativeness quotient. 
B) incentive coefficient. 
C) risk-sharing premium. 
D) efficient bargaining solution.

Question 14

Consider the salary of Mary Sue Nelson,a sales agent for Plain Truth Advertising.She has an effort cost of C = e2 and a reservation wage of $1,500 so that wage package is W = 1,500 + 0.2 Q where the CEO sets the incentive at 0.2 and Q = 200 e.If the CEO increases the incentive from 0.2 to 0.25,what happens to Nelson's effort? Will profits rise or fall?

Accepted Answer

Under the 0.2 incentive,Mary Sue's expec

Question 15

What are the factors that favor high incentive pay for an employee? Explain which of the five factors is the most important.

Accepted Answer

The following are factors that favor hig

Question 16

Consider the salary of Mary Sue Nelson,a sales agent for Plain Truth Advertising.She has an effort cost of C = e2 and a reservation wage of $1,500 so that her compensation package is W = 1,500 + 0.2 Q,where the CEO sets the incentive at 0.2 and Q = 200 e.Here effort is known only by the employee.There is a random shock to output each period whose mean is zero.
(a)What is the optimal effort for Mary Sue Nelson?
(b)On average,what total wage or salary will she earn each month?
(c)On average,what is the output of sales contracts that she makes?
(d)On average,what kind of profit will the CEO earn off of Nelson's work?

Accepted Answer

(a)Mary Sue's expected benefits are 1,50

Question 17

Which of these situations limit the use of ownership in resolving incentive problems?

Accepted Answer

A) The employees are well trained and highly qualified. 
B) The employees try to maximize their personal utility. 
C) The employees lack full control over their output. 
D) The actions of employees are unobservable. 
A) The employees are well trained and highly qualified. 
B) The employees try to maximize their personal utility. 
C) The employees lack full control over their output. 
D) The actions of employees are unobservable.

Question 18

An efficient allocation of risk among employees and owners must:

Accepted Answer

A) take into account that performance-based incentives are the sole important component of an employee's salary. 
B) take into account that attitudes toward risk differ among different people. 
C) recognize that employees have full control over their output. 
D) recognize that pooling of risks is never appropriate. 
A) take into account that performance-based incentives are the sole important component of an employee's salary. 
B) take into account that attitudes toward risk differ among different people. 
C) recognize that employees have full control over their output. 
D) recognize that pooling of risks is never appropriate.

Question 19

Dan Heath is the owner of Plain Truth Advertising.He is attempting to design salary systems for his employees,most of whom are sales agents.To get a good system,he needs to recognize the trade-offs between:

Accepted Answer

A) benefits and incentives. 
B) risk-sharing and benefits. 
C) benefits and salaries. 
D) risk-sharing and incentives. 
A) benefits and incentives. 
B) risk-sharing and benefits. 
C) benefits and salaries. 
D) risk-sharing and incentives.

Question 20

Dan Heath is the majority owner of Plain Truth Advertising.He hires Shirley Downs as the chief executive officer (CEO).In terms of an economic model,Mr.Heath is the ______ and Ms.Downs is the ______.

Accepted Answer

A) agent; principal. 
B) principal; agent. 
C) principal; intermediary. 
D) agent; intermediary. 
A) agent; principal. 
B) principal; agent. 
C) principal; intermediary. 
D) agent; intermediary.

One possible solution to an incentive problem arising under unobservable actions is:

Some industrial psychologists suggest that,"pay is not a motivator".How do they support the argument and what are the limitations of that argument?

A compensation program that includes all performance indicators that influence an employee's effort is called the:

Compared to owners,employees receive a large fraction of their incomes from their employers and are consequently dependent on the fortunes of that company in the marketplace.From a 'risk-sharing' perspective,an employee tends to prefer:

The basic incentive problem is that owners and employees:

Three difficulties that limit the usefulness of ownership in resolving incentive problems are:

Incentives are not likely to pose a problem:

The text quotes W.Edwards Deming as saying that "pay is not a motivator." The history of incentive pay plans shows that:

Alfie Kohn and Demming are of the opinion that:

The rate at which an employer provides an incentive for an employee to perform (to increase effort)is the:

What are the factors that favor high incentive pay for an employee? Explain which of the five factors is the most important.

Which of these situations limit the use of ownership in resolving incentive problems?

An efficient allocation of risk among employees and owners must:

Dan Heath is the owner of Plain Truth Advertising.He is attempting to design salary systems for his employees,most of whom are sales agents.To get a good system,he needs to recognize the trade-offs between:

Dan Heath is the majority owner of Plain Truth Advertising.He hires Shirley Downs as the chief executive officer (CEO).In terms of an economic model,Mr.Heath is the and Ms.Downs is the .

Introduction

Economists View of Behavior

Exchange and Markets

Demand

Production and Cost

Market Structure

Pricing With Market Power

Economics of Strategy: Creating and Capturing Value

Economics of Strategy: Game Theory

Incentive Conflicts and Contracts

Organizational Architecture

Decision Rights: the Level of Empowerment

Decision Rights: Bundling Tasks Into Jobs and Subunits

Attracting and Retaining Qualified Employees

Individual Performance Evaluation

Divisional Performance Evaluation

Corporate Governance

Vertical Integration and Outsourcing

Leadership: Motivating Change Within Organizations

Understanding the Business Environment: the Economics of Regulation

Ethics and Organizational Architecture

Organizational Architecture and the Process of Management Innovation

Filters

Exam 15: Incentive Compensation

One possible solution to an incentive problem arising under unobservable actions is:

Some industrial psychologists suggest that,"pay is not a motivator".How do they support the argument and what are the limitations of that argument?

A compensation program that includes all performance indicators that influence an employee's effort is called the:

Compared to owners,employees receive a large fraction of their incomes from their employers and are consequently dependent on the fortunes of that company in the marketplace.From a 'risk-sharing' perspective,an employee tends to prefer:

The basic incentive problem is that owners and employees:

Three difficulties that limit the usefulness of ownership in resolving incentive problems are:

Incentives are not likely to pose a problem:

The text quotes W.Edwards Deming as saying that "pay is not a motivator." The history of incentive pay plans shows that:

Alfie Kohn and Demming are of the opinion that:

The rate at which an employer provides an incentive for an employee to perform (to increase effort)is the:

What are the factors that favor high incentive pay for an employee? Explain which of the five factors is the most important.

Which of these situations limit the use of ownership in resolving incentive problems?

An efficient allocation of risk among employees and owners must:

Dan Heath is the owner of Plain Truth Advertising.He is attempting to design salary systems for his employees,most of whom are sales agents.To get a good system,he needs to recognize the trade-offs between:

Dan Heath is the majority owner of Plain Truth Advertising.He hires Shirley Downs as the chief executive officer (CEO).In terms of an economic model,Mr.Heath is the ______ and Ms.Downs is the ______.

Introduction

Economists View of Behavior

Exchange and Markets

Demand

Production and Cost

Market Structure

Pricing With Market Power

Economics of Strategy: Creating and Capturing Value

Economics of Strategy: Game Theory

Incentive Conflicts and Contracts

Organizational Architecture

Decision Rights: the Level of Empowerment

Decision Rights: Bundling Tasks Into Jobs and Subunits

Attracting and Retaining Qualified Employees

Individual Performance Evaluation

Divisional Performance Evaluation

Corporate Governance

Vertical Integration and Outsourcing

Leadership: Motivating Change Within Organizations

Understanding the Business Environment: the Economics of Regulation

Ethics and Organizational Architecture

Organizational Architecture and the Process of Management Innovation

Filters

Dan Heath is the majority owner of Plain Truth Advertising.He hires Shirley Downs as the chief executive officer (CEO).In terms of an economic model,Mr.Heath is the and Ms.Downs is the .