Question 1

Which one of the following statements about piece rate compensation schemes is false?

Accepted Answer

A)   They attract more able workers.
B)   They elicit high levels of effort.
C)   They are preferred by discriminatory firms.
D)   They discourage nepotism.
E)   They tie pay to performance. C

Question 2

Which of the following is not true regarding the incentives different pay structures impose on workers?

Accepted Answer

A)   Piece rates are an option when individual output is easily measured by firms.
B)   Tournaments can elicit more effort than a time rate.
C)   Worker effort can be a function of the pay structure.
D)   Worker productivity is unrelated to the pay structure.
E)   Profit sharing is a pay structure designed to elicit more effort from workers, but it can suffer from free-riding. D

Question 3

The bonding critique criticizes the model of efficiency wages because

Accepted Answer

A)   profit-maximizing firms should never be willing to pay more than the competitive wage.
B)   workers should be willing to give the firm collateral that the firm would keep if the firm ever caught the worker shirking, and in exchange the worker would be willing to work for a wage less than the efficiency wage.
C)   firms cannot issue bonds to pay for labor costs.
D)   workers do not know how well the firm can monitor worker effort.
E)   worker effort is unrelated to wages. B

Question 4

A standard efficiency wage model pays workers higher wages in order to increase worker efficiency. As a result, firm profits increase and there is a pool of involuntarily unemployed workers. In this model, if the firm's cost of monitoring effort falls,

Accepted Answer

A)   the efficiency wage will fall.
B)   the number of shirking workers will fall.
C)   firm profits will fall.
D)   the firm will monitor less.
E)   the pool of involuntarily unemployed workers will increase.

Question 5

A standard efficiency wage model pays workers higher wages in order to increase worker efficiency. As a result, firm profits increase and there is a pool of involuntarily unemployed workers. This equilibrium comes about in part because

Accepted Answer

A)   the firm pays workers according to a tournament.
B)   workers are less likely to shirk when there is a pool of unemployed workers who are willing to take their job.
C)   the firm agrees to not replace labor with capital.
D)   workers are unaware of the pool of unemployed workers as long as they keep their job.
E)   workers will do anything to be paid a higher wage.

Question 6

Which of the following statements is false?

Accepted Answer

A)   Profit sharing redistributes profits back to the workers.
B)   Bonuses are frequently linked to performance.
C)   Bonuses are paid in addition to base salary.
D)   Free-riding can result from a compensation scheme that gives competitive individual bonuses.
E)   Free-riding can result from profit sharing.

Question 7

The idea of linking public school teacher salaries to student outcomes is basically an attempt to impose a ________ compensation scheme on teachers.

Accepted Answer

A)   time rate
B)   piece rate
C)   tournament
D)   profit sharing
E)   work-for-pay

Question 8

One disadvantage of using a tournament is that

Accepted Answer

A)   no one will apply for tournament-style jobs.
B)   tournaments are more expensive than time rates or piece rates.
C)   workers who view themselves as losing the tournament will quit providing effort.
D)   the winners of tournaments are typically overpaid.
E)   tournaments are not able to identify the most productive workers.

Question 9

The optimal efficiency wage requires

Accepted Answer

A)   firms to pay the competitive wage.
B)   firms to pay any wage above the competitive wage.
C)   firms to pay the unique wage above the competitive wage such that the elasticity of output with respect to wages equals one.
D)   firms to pay fringe benefits.
E)   the total product curve to be downward sloping.

Question 10

Suppose a firm overpays its workers at the start of the job, and then the firm slowly lowers wages over time until eventually the firm pays the workers considerably less than the worker's marginal product of labor. What prevents this "reverse of a delayed-compensation scheme" from being implemented?

Accepted Answer

A)   Workers prefer wages to increase over time.
B)   The firm would fire the worker as soon as the worker's value of marginal product exceeded the worker's wage.
C)   Workers would leave the job as soon as the firm tried to pay the worker less than his or her value of marginal product.
D)   The firm would need to enforce a mandatory retirement age, which is illegal in the United States.
E)   The workers would never have an incentive to invest in general training.

Question 11

One argument against using a profit-sharing scheme is the potential for free-riding. In this situation, free-riding refers to

Accepted Answer

A)   one firm using the same contract specifications as another firm.
B)   a worker not providing effort because his contribution to profit is very small.
C)   a worker not providing effort because he does not want his coworkers' wages to increase.
D)   the firm not honestly reporting its profits.
E)   profits being insensitive to worker effort because all increases in profit are returned to the workers due to the profit-sharing scheme.

Question 12

A firm owner wants a manager to make difficult personnel decisions when necessary (which requires firing a worker every now and then) in order to maximize the firm's profits. The manager, however, prefers to not fire anyone. The worker also prefers not to be fired. In this example, who is the principal and who is the agent?

Accepted Answer

A)   The firm owner is the principal. The manager is the agent.
B)   The firm owner is the principal. The should-be-fired worker is the agent.
C)   The manager is the principal. The firm owner is the agent.
D)   The should-be-fired worker is the principal. The manager is the agent.
E)   The should-be-fired worker is the principal. The firm owner is the agent.

Question 13

Under a piece rate pay scheme where all workers face different upward-sloped marginal cost curves for providing effort,

Accepted Answer

A)   all workers will provide the same amount of effort.
B)   all workers will produce the same amount of output.
C)   all workers will be paid the same amount.
D)   workers with higher marginal cost curves for providing effort will produce more output than workers with lower marginal cost curves.
E)   workers with higher marginal cost curves for providing effort will produce less output than workers with lower marginal cost curves.

Question 14

Which is not true regarding a delayed-compensation contract?

Accepted Answer

A)   It discourages workers from shirking.
B)   It decreases employee turnover within the firm.
C)   An effective one requires a mandatory retirement age.
D)   It necessarily costs more in labor costs than a time rate system.
E)   It is associated with an upward-sloping age-earnings profile.

Question 15

Piece rates typically

Accepted Answer

A)   encourage greater effort from workers.
B)   are more common than time rates.
C)   are associated with the worker incurring less risk concerning one's income.
D)   are more common among lower paying jobs.
E)   do not reward skill.

Question 16

Which of the following is a possible disadvantage of a tournament?

Accepted Answer

A)   Competitors have little incentive to help one another (and they may even sabotage each other's work) .
B)   Workers will stop providing effort as soon as they believe they have no chance to win the prize.
C)   Workers may collude to share the prize in order to provide lower levels of effort.
D)   The outcome of a tournament may appear to be random.
E)   All of the above are possible disadvantages of a tournament.

Question 17

If designed correctly, tournaments

Accepted Answer

A)   discourage competition.
B)   reward players according to their ranked productivity.
C)   elicit equal effort from all workers.
D)   always reward a single winner.
E)   reduce the applicant pool to just those workers with the best degrees.

Question 18

Which one of the following statements best describes profit sharing?

Accepted Answer

A)   It is an equal division of all revenues among workers.
B)   It ties pay to the performance of individuals.
C)   It is a program that donates profits to the poor.
D)   It provides a system by which workers receive a share of the firm's profits.
E)   It discourages free-riding among workers.

Question 19

To pay piece rates in order to elicit effort, it must be the case that

Accepted Answer

A)   the firm can monitor individual worker output.
B)   workers refuse to accept a time rate.
C)   firms cannot monitor individual worker effort.
D)   the production process relies on group work.
E)   the firm does not want to maximize profits.

Question 20

A firm that finds it extremely expensive to monitor the output of each worker will likely pay its workers

Accepted Answer

A)   with piece rates.
B)   with time rates.
C)   with incentive pay.
D)   according to how much each worker produces.
E)   on commission.

Exam 11: Incentive Pay