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.

Relationship-specific exchange:

If a firm manager has a base salary of $50,000 and also gets 2 percent of all profits, how much will his/her income be if revenues are $8,000,000 and profits are $2,000,000?

The most commonly used negative incentive used by firms is:

Which of the following methods might be an efficient way of obtaining inputs when specialized investments are not important?

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

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

Piece rates are typically a solution to the:

Long-term contracts become longer:

A potential problem with piece-rate plans is that:

A firm might choose to produce its own inputs if:

A potential problem with piece-rate plans is that:

Franchising mitigates:

Refer to the figure below. Suppose that the marginal benefit of writing a contract is $100 and the marginal cost of that contract is $100. Based on this information, the optimal contract length should be:

The agent is an individual:

Suppose compensation is given by W = 512,000 + 217π + 10.08S, where W = total compensation of the CEO, π = company profits (in millions) = $200, and S = sales (in millions) = $400. What percentage of the CEO's total earnings are tied to profits of the firm?

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

Which of the following payment plans does NOT give an incentive to a manager to stop shirking?

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

In the absence of worker incentives: