Question 1

A tournament increases the amount of risk from the external environment.

Accepted Answer

A) True 
 B)False

Question 2

Economists call a compensation scheme in which pay is based on relative performance a tournament.

Accepted Answer

A) True 
 B)False

Question 3

Careful design of an incentive scheme can narrow the gap between "what you want" and "what you pay for."

Accepted Answer

A) True 
 B)False

Question 4

A tournament removes risks from outside factors but adds another type of risk called:

Accepted Answer

A)  internal risk. 
B)  ability risk. 
C)  personal risk. 
D)  competition risk. 
A)  internal risk. 
B)  ability risk. 
C)  personal risk. 
D)  competition risk.

Question 5

When a teacher grades on a curve, it increases the incentive to study, particularly when:

Accepted Answer

A)  it is known that many students in the class have high ability. 
B)  the majority of students are of similar abilities. 
C)  the teacher is bad. 
D)  the teacher is good. 
A)  it is known that many students in the class have high ability. 
B)  the majority of students are of similar abilities. 
C)  the teacher is bad. 
D)  the teacher is good.

Question 6

What are the benefits and problems of piece rate systems?

Accepted Answer

Piece rate systems reward worker effort

Question 7

Intrinsic motivations may be more important in a wage rate system than in a piece rate system at generating employee effort.

Accepted Answer

A) True 
 B)False

Question 8

Why did teacher cheating become more common in Chicago public schools?

Accepted Answer

A)  The school system made it easier for teachers to get tenure. 
B)  A new policy that closed down schools with low test scores increased the incentive for cheating. 
C)  The school system had to rely on more substitute teachers because of budget issues. 
D)  Younger and less experienced teachers were replacing the retiring older teachers. 
A)  The school system made it easier for teachers to get tenure. 
B)  A new policy that closed down schools with low test scores increased the incentive for cheating. 
C)  The school system had to rely on more substitute teachers because of budget issues. 
D)  Younger and less experienced teachers were replacing the retiring older teachers.

Question 9

Quality control is an important element of an effective ______ pay scheme.

Accepted Answer

A)  piece rate 
B)  wage rate 
C)  smooth rate 
D)  overtime 
A)  piece rate 
B)  wage rate 
C)  smooth rate 
D)  overtime

Question 10

Which of the following statements is TRUE?
I. Tournament compensation does not depend on factors outside the worker's control, such as the state of the economy.
II. Tournament compensation increases the risk that workers will receive low pay in a bad economy.
III. Tournament compensation can increase worker effort when external factors cause poor performance.

Accepted Answer

A)  II only 
B)  I only 
C)  II and III only 
D)  I and III only 
A)  II only 
B)  I only 
C)  II and III only 
D)  I and III only

Question 11

Economists call a compensation scheme in which pay is based on relative performance a:

Accepted Answer

A)  profit sharing plan. 
B)  bonus plan. 
C)  salary. 
D)  tournament. 
A)  profit sharing plan. 
B)  bonus plan. 
C)  salary. 
D)  tournament.

Question 12

In order for a piece rate to result in high-quality output by workers, it requires:

Accepted Answer

A)  no environmental risk. 
B)  the piece rate to be lower than the hourly wage. 
C)  good quality control. 
D)  workers to have equal abilities. 
A)  no environmental risk. 
B)  the piece rate to be lower than the hourly wage. 
C)  good quality control. 
D)  workers to have equal abilities.

Question 13

When using a piece rate system:

Accepted Answer

A)  it is important to measure and observe worker quality. 
B)  a firm may attract more unproductive workers. 
C)  a firm will experience a decrease in output. 
D)  All of the answers are correct. 
A)  it is important to measure and observe worker quality. 
B)  a firm may attract more unproductive workers. 
C)  a firm will experience a decrease in output. 
D)  All of the answers are correct.

Question 14

Higher product quality:

Accepted Answer

A)  can sometimes lead to lower product costs. 
B)  requires a strong incentive scheme. 
C)  requires a weak incentive scheme. 
D)  is most easily achieved through a publicly provided system. 
A)  can sometimes lead to lower product costs. 
B)  requires a strong incentive scheme. 
C)  requires a weak incentive scheme. 
D)  is most easily achieved through a publicly provided system.

Question 15

If executives were paid based on relative performance:

Accepted Answer

A)  compensation would largely be based on luck. 
B)  there would be less volatility in executive pay. 
C)  stockholders would find it more difficult to monitor how much the executives are being paid. 
D)  executives would have less incentive to work hard since ability risk is now high. 
A)  compensation would largely be based on luck. 
B)  there would be less volatility in executive pay. 
C)  stockholders would find it more difficult to monitor how much the executives are being paid. 
D)  executives would have less incentive to work hard since ability risk is now high.

Question 16

Suppose an average student gets mistakenly enrolled in an honors class. In the context of a tournament, which of the following risks is most likely to occur?

Accepted Answer

A)  environment risk 
B)  registrar risk 
C)  school board risk 
D)  ability risk 
A)  environment risk 
B)  registrar risk 
C)  school board risk 
D)  ability risk

Question 17

Companies sometimes doctor their earnings statements to appear more profitable than they are. What incentive might a CEO who engineers this be responding to?

Accepted Answer

When CEOs are paid in stock op

Question 18

There is evidence that wrong incentives in education have led to cheating by teachers.

Accepted Answer

A) True 
 B)False

Question 19

Paying grape pickers by the hour is an example of ______ pay.

Accepted Answer

A)  piece rate 
B)  wage rate 
C)  smooth rate 
D)  overtime 
A)  piece rate 
B)  wage rate 
C)  smooth rate 
D)  overtime

Question 20

Suppose you're hired by a company to advise them on improving their corporate culture so productivity increases. Which of the following would be good advice to give managers?

Accepted Answer

A)  "Learn everyone's names." 
B)  "Give more days off." 
C)  "Award a cash prize to the top performer each month." 
D)  "Increase hourly pay." 
A)  "Learn everyone's names." 
B)  "Give more days off." 
C)  "Award a cash prize to the top performer each month." 
D)  "Increase hourly pay."

Exam 22: Managing Incentives

A tournament increases the amount of risk from the external environment.

Economists call a compensation scheme in which pay is based on relative performance a tournament.

Careful design of an incentive scheme can narrow the gap between "what you want" and "what you pay for."

A tournament removes risks from outside factors but adds another type of risk called:

When a teacher grades on a curve, it increases the incentive to study, particularly when:

What are the benefits and problems of piece rate systems?

Intrinsic motivations may be more important in a wage rate system than in a piece rate system at generating employee effort.

Why did teacher cheating become more common in Chicago public schools?

Quality control is an important element of an effective ______ pay scheme.

Economists call a compensation scheme in which pay is based on relative performance a:

In order for a piece rate to result in high-quality output by workers, it requires:

When using a piece rate system:

Higher product quality:

If executives were paid based on relative performance:

Suppose an average student gets mistakenly enrolled in an honors class. In the context of a tournament, which of the following risks is most likely to occur?

Companies sometimes doctor their earnings statements to appear more profitable than they are. What incentive might a CEO who engineers this be responding to?

There is evidence that wrong incentives in education have led to cheating by teachers.

Paying grape pickers by the hour is an example of ______ pay.

Suppose you're hired by a company to advise them on improving their corporate culture so productivity increases. Which of the following would be good advice to give managers?

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Equilibrium

Elasticity and Its Applications

Taxes and Subsidies

The Price System

Price Ceilings and Floors

International Trade

Externalities- When the Price Is Not Right

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination

Oligopoly and Game Theory

Competing for Monopoly

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Stock Markets and Personal Finance

Price Discrimination

Consumer Choice

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