Exam 6: The Organization of the Firm

Suppose compensation is given by W = 500,000 + 200  + 17S,where W = total compensation of the CEO, = company profits (in millions)= $400,and S = sales (in millions)= $700.What percentage of the CEO's total earnings is tied to profits of the firm?

The activity known as shirking is LEAST likely to occur when:

A relationship-specific exchange occurs when:

Which of the following forms of payment is NOT an incentive plan?

Long-term contracts are NOT efficient if:

Point B in the figure below is:

Which of the following involves the most risk from the point of view of the employee?

Suppose a new contracting environment that requires greater specialized investments is considered.This new contract will result in:

Dallas-based Southwest Airlines recently announced a 10-year contract that gives pilots a greater opportunity to share in the profits of the airline.According to the terms of the contract,the pilots will receive options to buy 14 million shares of the firm's stock over the next 10 years.What impact do you think this new contract will have on Southwest Airlines?

Which of the following is NOT an example of a piece-rate compensation method?

A negative side of a revenue-sharing plan is that it:

An increase in the marginal cost arising from a more complex specialized investment environment will cause the optimal contract length to:

Which of the following is the primary disadvantage of producing inputs within a firm?

Spot checks work because of:

The most likely effect of reducing performance-based rewards for the CEOs of corporations would be:

Hold-up:

A manager derives satisfaction from income and leisure on the job (shirking). a.If the manager is paid a fixed salary of $100,000,how much leisure will she consume on the job during an eight-hour day? b.When the manager is given a salary of $100,000 plus 10 percent of the firm's profits,she chooses to spend six hours managing and two hours consuming leisure.Salary and bonus total $120,000.Does the manager necessarily prefer this situation to the situation in part (a)?

Specialized investments:

EFI Conveyor Systems recently visited a local AC motor distributor.This transaction most likely involves:

Explain why people in the following occupations are compensated as they are. a.Insurance agents b.Football players c.Authors d.CEOs of major corporations e.Food servers