Question 1

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 over-paid. 
E) tournaments are not able to identify the most productive workers.

Question 2

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 3

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.

Question 4

What prevents a firm from offering a delayed-compensation scheme to its employees and then firing each worker when the worker's wage exceeds his or her value of marginal product?

Accepted Answer

A) Firms that offer delayed-compensation schemes are legally barred from firing workers. 
B) Profits would increase by allowing the worker to continue on. 
C) The worker will have already retired by the time the worker's value of marginal product exceeds his or her wage. 
D) The firm would lose the trust of the workers, and new workers would not accept the payment scheme. 
E) Profits are insensitive to when the worker quits his job.

Question 5

Which one of the following statements best describes profit sharing?

Accepted Answer

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

Question 6

Middle-aged workers being paid more than their younger counterparts is likely due to

Accepted Answer

A) the natural inverse relationship between age and experience. 
B) the implementation of a mandatory retirement age by the firm. 
C) more recent education and job training programs being more effective than older programs. 
D) firms using a delayed compensation scheme. 
E) workers prefer delaying their earnings to as late in life as possible.

Question 7

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 8

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 9

When considering the running of a corporation, there is a principal-agent problem between shareholders and the CEO because

Accepted Answer

A) shareholders want the firm to maximize the firm's share price while the CEO wants to maximize profits. 
B) the CEO is paid in part with stock options. 
C) shareholders cannot observe all of the CEO's decisions. 
D) shareholders sign confidentiality agreements. 
E) shareholders require the firm to pay a dividend.

Question 10

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.

Exam 11: Incentive Pay