Exam 6: The Organization of the Firm

Suppose a principal knew with certainty the level of profits that would result if an agent put forth maximum effort. a.Would there be a principal-agent problem? b.Devise two incentive contracts that would induce the manager to put forth maximum effort in this instance.

The presence of substantial specialized investment relative to contracting costs suggests that the optimal input procurement method is:

Under a profit-sharing compensation scheme,the manager will:

Which of the following is NOT an implication of specialized investments that lead to increased transaction costs?

Suppose a firm manager has a base salary of $175,000 and earns 0.5 percent of all profits.Determine the manager's income if revenues are $10,000,000 and profits are $5,000,000.

Which of the following is NOT a type of specialized investment?

One way of alleviating opportunism is:

Which of the following is an outside incentive that forces managers to put forth maximal effort?

In order for spot checks to be effective,they must be:

Suppose a firm manager has a base salary of $75,000 and earns 1.5 percent of all profits.Determine the manager's income,if revenues are $10,000,000 and profits are $5,000,000.

Transaction costs refer to:

Determine whether the following transactions involve spot exchange,contracts,or vertical integration. a.A major oil company refines gasoline from crude oil produced by oil wells that it owns. b.Transcontinental,an interstate natural-gas pipeline,has a legal obligation to purchase a specified amount of gas per week from a well owned by Fred Smith in Enid,Oklahoma. c.A cabinetmaker purchases a dozen wood screws from the local hardware store. d.An electric utility purchases coal from an underground mine.

Which of the following occurs as firm size grows?

An increase in the marginal benefit arising from a specialized investment will cause the optimal contract length to:

If a manager wishes to produce a large level of output,which compensation mechanism is most effective?

A decrease in the marginal benefit arising from a specialized investment will cause the optimal contract length to:

Explain how each of the following affects the optimal method of acquiring an input. a.A complex contracting environment b.A specialized investment c.Opportunism d.Bargaining costs e.The costs of bureaucracy f.Gains from specialization

Which type of compensation method does NOT involve a performance bonus?

Given that the income for a franchise restaurant manager is directly tied to profits,while the income for the manager of a company-owned restaurant is paid a flat fee,we might expect profits to be:

Which of the following is NOT a means of avoiding opportunism?