Question 1

Use an example to describe how strong incentive schemes may lead to undesirable outcomes when the gap between "what you pay for" and "what you want" is significant.

Accepted Answer

If public schools are paid for higher te

Question 2

When Safelite Glass Corporation switched to a piece rate system of compensation in 1994, productivity:

Accepted Answer

A)  decreased by 44%. 
B)  decreased by 22%. 
C)  increased by 22%. 
D)  increased by 44%. 
A)  decreased by 44%. 
B)  decreased by 22%. 
C)  increased by 22%. 
D)  increased by 44%.

Question 3

It is better for a ________ teacher to grade on a curve than a ________ teacher.

Accepted Answer

A)  good; bad 
B)  bad; good 
C)  English; literature 
D)  literature; English 
A)  good; bad 
B)  bad; good 
C)  English; literature 
D)  literature; English

Question 4

What compensation scheme might improve the performance of the highly paid CEOs affected by external market forces?

Accepted Answer

Tournament theory could be used to impro

Question 5

An advertising company designs a bonus system for its managers such that the faster they spread their advertisements around the world, the greater the bonuses they get. What are some of the pitfalls of such an incentive scheme?

Accepted Answer

Advertisements in different countries ha

Question 6

A majority of workers are paid piece rate.

Accepted Answer

A) True 
 B)False

Question 7

What is meant by the term corporate culture?

Accepted Answer

The system of values and norms

Question 8

Job X pays a yearly salary of $52,000, regardless of the state of the economy. Job Y pays a yearly salary of $10,000 in a bad economy and $70,000 in a good economy. The probability of a bad economy is 0.30. Which job would most people prefer?

Accepted Answer

A)  Job Y because the expected payoff is $70,000 70% of the time. 
B)  Job X because it is more certain than the $52,000 expected payoff of Job Y. 
C)  Job X because $52,000 exceeds the expected payoff of Job Y by $3,000. 
D)  Job Y because the expected payoff of $70,000 is greater than $55,000. 
A)  Job Y because the expected payoff is $70,000 70% of the time. 
B)  Job X because it is more certain than the $52,000 expected payoff of Job Y. 
C)  Job X because $52,000 exceeds the expected payoff of Job Y by $3,000. 
D)  Job Y because the expected payoff of $70,000 is greater than $55,000.

Question 9

Piece rates do not work well when:

Accepted Answer

A)  quality is important but quality control is expensive. 
B)  quality is important and quality control is not costly. 
C)  quality is not important and quality control is not costly. 
D)  quality is not important but quality control is expensive. 
A)  quality is important but quality control is expensive. 
B)  quality is important and quality control is not costly. 
C)  quality is not important and quality control is not costly. 
D)  quality is not important but quality control is expensive.

Question 10

Paying grape pickers by the pound 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 11

A well-functioning incentive scheme may provide a base wage to limit environmental risk and intrinsic rewards to maintain quality.

Accepted Answer

A) True 
 B)False

Question 12

Pay for stock price-based relative performance has:

Accepted Answer

A)  not been adopted. 
B)  not been widely adopted. 
C)  been widely adopted. 
D)  been adopted by all firms. 
A)  not been adopted. 
B)  not been widely adopted. 
C)  been widely adopted. 
D)  been adopted by all firms.

Question 13

Inspired by Sunstein and Thaler, the British government has created a Behavioral Insights Team, popularly called the "nudge unit," for what reasons?

Accepted Answer

The British government created the "nudg

Question 14

Commissions are a type of piece rate pay.

Accepted Answer

A) True 
 B)False

Question 15

If your economics professor grades on a curve and all students agree to get together (i.e., collude) and not study, overall effort is reduced and the grade distribution remains relatively unchanged. Explain whether this is a realistic outcome. Does your answer differ depending on whether the class is large or small? Relate your answer to the problems of collusion in cartels discussed in the chapter on oligopolies.

Accepted Answer

Collusion among students is probably not

Question 16

Grading on a curve:

Accepted Answer

A)  reduces environment risk, but increases ability risk. 
B)  reduces both environment risk and ability risk. 
C)  increases environment risk, but reduces ability risk. 
D)  increases both environment risk and ability risk. 
A)  reduces environment risk, but increases ability risk. 
B)  reduces both environment risk and ability risk. 
C)  increases environment risk, but reduces ability risk. 
D)  increases both environment risk and ability risk.

Question 17

When incentives are strong:

Accepted Answer

A)  people have more of an incentive to cheat. 
B)  "what you pay for" will not align with "what you get." 
C)  monitoring will be more difficult. 
D)  it will be difficult to predict the outcome. 
A)  people have more of an incentive to cheat. 
B)  "what you pay for" will not align with "what you get." 
C)  monitoring will be more difficult. 
D)  it will be difficult to predict the outcome.

Question 18

A variety of ways that governments and other organizations can use small changes in the choice architecture to change or improve decisions are called:

Accepted Answer

A)  architectural decisions. 
B)  framing. 
C)  front of the store. 
D)  a nudge. 
A)  architectural decisions. 
B)  framing. 
C)  front of the store. 
D)  a nudge.

Question 19

The problem with tying executive pay to stock prices is that:

Accepted Answer

A)  many factors other than executive effort and ability affect stock prices. 
B)  executives can manipulate stock prices. 
C)  stock price does not reflect firm performance. 
D)  executives prefer more straightforward compensation schemes that reduce their risk. 
A)  many factors other than executive effort and ability affect stock prices. 
B)  executives can manipulate stock prices. 
C)  stock price does not reflect firm performance. 
D)  executives prefer more straightforward compensation schemes that reduce their risk.

Question 20

Compared with a piece rate system, hourly wage plans are more likely to attract workers who are less capable or even lazy.

Accepted Answer

A) True 
 B)False

Exam 22: Managing Incentives

Use an example to describe how strong incentive schemes may lead to undesirable outcomes when the gap between "what you pay for" and "what you want" is significant.

When Safelite Glass Corporation switched to a piece rate system of compensation in 1994, productivity:

It is better for a ________ teacher to grade on a curve than a ________ teacher.

What compensation scheme might improve the performance of the highly paid CEOs affected by external market forces?

An advertising company designs a bonus system for its managers such that the faster they spread their advertisements around the world, the greater the bonuses they get. What are some of the pitfalls of such an incentive scheme?

A majority of workers are paid piece rate.

What is meant by the term corporate culture?

Job X pays a yearly salary of $52,000, regardless of the state of the economy. Job Y pays a yearly salary of $10,000 in a bad economy and $70,000 in a good economy. The probability of a bad economy is 0.30. Which job would most people prefer?

Piece rates do not work well when:

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

A well-functioning incentive scheme may provide a base wage to limit environmental risk and intrinsic rewards to maintain quality.

Pay for stock price-based relative performance has:

Inspired by Sunstein and Thaler, the British government has created a Behavioral Insights Team, popularly called the "nudge unit," for what reasons?

Commissions are a type of piece rate pay.

Grading on a curve:

When incentives are strong:

A variety of ways that governments and other organizations can use small changes in the choice architecture to change or improve decisions are called:

The problem with tying executive pay to stock prices is that:

Compared with a piece rate system, hourly wage plans are more likely to attract workers who are less capable or even lazy.

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

Filters

It is better for a teacher to grade on a curve than a teacher.