Exam 6: The Organization of the Firm

At the recent shareholders' meeting, the CEO of a small bank proposed a plan to offer each of its employees 250 incentive options for Class A common stock. The key provisions of the plan are that employees must exercise the options between January 2014 and December 2019, and if an employee terminates his or her employment with the bank (or is terminated), the options are no longer exercisable. One shareholder feverishly objected to the plan, claiming that such a move would dilute the value of the outstanding shares. As CEO, how would you defend the stock option plan to the shareholders?

Shirking can take the form of:

When relationship-specific exchange occurs in complex contractual environments, the best way to purchase inputs is through:

Long-term contracts are NOT efficient if:

Spot exchange typically involves:

Time clocks are typically a solution to the:

The specificity of the asset (or investment) leads to the possibility of:

A profit-sharing pay scheme:

Spot checks work because of:

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.

The principal's goals are NOT in line with the goals of:

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

A spot exchange involves a market where goods are bought and sold at a:

A manager who tries to enhance worker effort by tying workers' compensation to the profitability of the firm is using:

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

Refer to the figure below. Suppose that the marginal benefit of writing a contract is $100 and the marginal cost of that contract is $150. Based on this information, the optimal contract length should be:

Principal-agent problems do NOT arise between:

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

Spot markets are generally preferable to:

In a 1998 press release, Boeing Commercial Airplane Group (BCAG) announced that it was signing a 10-year contract with distributor Thyssen Inc., a distributor of raw aluminum, valued at approximately $300 million. The contract reflected Boeing's effort to reduce costs and production bottlenecks resulting from supply shortages. The contract specified prices and guaranteed quantities of raw aluminum to be delivered to BCAG's suppliers. If you were the production manager at BCAG, how would you justify the long-term nature of the contact with Thyssen Inc.?