Exam 6: The Organization of the Firm

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:

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

Which of the following occurs as firm size grows?

To ensure quality, piece-rate plans must usually be accompanied by:

According to Industry Week, a shoe manufacturer recently had a production run that resulted in 100,000 pairs of defective shoes. Workers on the production line knew the shoes were defective as they were being produced, but did nothing to fix the problem. Do you think a profit-sharing plan for workers would mitigate future problems? Explain.

College Retirement Equities Fund (CREF) is a pension fund that has billions of dollars invested in the stock market. Fund participants recently voted on a proposal that would have placed strict limits on the amount of compensation paid to CREF executives. Why do you think 75 percent of the participants voted against the proposal?

Hold-up:

A positive side of long-term contracts is:

As firms increase in size, they tend to experience a:

Long-term contracts are LESS likely when:

Which of the following institutions may result in hold-up?

Specialized investments:

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

Which type of compensation mechanism works by threats?

The problem with spot exchange in the presence of specific assets is that both parties:

Refer to the figure below. Suppose that the marginal benefit of writing a contract is $100 and the marginal cost of that contract is $50. Based on this information, the optimal contract length should:

The cost to a manager of doing a poor job running the firm is: