Final Exam Practice Questions
Econ 651
Dr. John Horowitz
1) The transactions costs of writing and enforcing contracts are higher:
a) in countries with poorly-enforced property rights.
(cost of making the deal)
b) in countries with strongly-enforced property rights.
c) in all counties with good court systems.
d) in countries without political risks of property confiscation.
2) Informational deficits of producers or consumers, plus problems of externalities, can:
a) cause market failure.
b) always be solved by alternative dispute resolution (ADR).
c) improve free trade.
d) restrict the use of property rights in a market economy.
3) Many people believe that the supply and demand for regulation will result in the most powerful coalition group controlling the regulatory body. That powerful group is often made up of the companies that are supposed to be regulated. This theory is called:
a) the capture theory.
(from chpt on theory of regulation-example, high rail road rates
start the interstate commerce commission.
b) adverse selection theory.
(look up insurance and adverse selection)
c) the law of demand.
d) market failure theory.
4) In a regulatory environment, the number of regulated companies is small and the payoff to successful lobbying is large, and:
a) the number of consumers is also small, but their payoff to success is also small for each person.
b) the number of consumers is large, and the payoff to success is small for each person.
(example: Milk producers: a few milk producers go to lobby for higher milk prices. OR Electric companies wanting higher electric rates.
c) the number of regulators is small and corrupt.
d) the supply of regulation is usually tied to another industry’s success.
5) J.L. Pratt noted of the old General Motors that, “When one of them had a project, why he would get the vote of his fellow members, if they would vote for his project, he would vote for theirs.” This is called:
a) logrolling.
[n] act of exchanging favors for mutual gain; especially trading of influence or votes among legislators to gain passage of certain projects
b) hypertension.
c) a violation of antitrust law.
d) proposal marketing.
6) When a corporation participates in more than one successive stage in a multi-stage production process it is said to be:
a) vertically integrated.
(production, distribution)
b) completely outsourced.
c) engaged in preliminary contracts.
d) functionally organized.
7) While firms buy many of their inputs through the open market, there is often a desire to produce critical inputs. A common concern in producing an input yourself (internally) is that:
a) the firm will find it too easy to manage quality.
b) the firm will not minimize costs at a high enough level of output.
c) outside competitors will learn about your inputs.
d) your firm will get prompt supply of the input.
8) Markets are usually preferred by economists for efficient transactions. However, Ronald Coase noted that administrative solutions may be superior because market transactions are:
a) never at the equilibrium price.
b) not costless
(Is the reason we have firms. ).
c) always result in a price that clears the market.
d) hindered by technological change.
9) Specific assets can create problems for a company. If a supplier invests in new machinery to deliver a part useful only to its biggest and best customer, it can find itself with:
a) a low cost delivery output.
b) a holdup problem.
(Once the firm has incurred the cost, customer could come back and demand a lower price)
c) significant externalities.
d) an outsourcing dilemma.
10) Tasty Chicken has been buying its animal feed in the open market. It notices that about 10 percent of its purchases are watered down, so that the feed seems to weigh more than it actually does. To improve quality of its purchases, Tasty Chicken might consider:
a) moving to long-term contracts with specific feed producers.
b) hiring an economist to see if the market is really competitive.
c) lobbying for new laws concerning water levels in feed.
d) going out of the chicken processing business.
11) If an important component of a firm’s production is difficult to specify in a contract and even more difficult to enforce in its production standards, then it probably makes sense:
a) to buy the component in the open market.
b) to use a simple short term contract.
c) to vertically integrate upstream to build the component.
d) to take the risks necessary to buy the component.
12) Independent franchisees can free ride on the name brand of the franchisor. Two solutions to this problem are:
a) higher franchise fees and long term contracts.
b) open market transactions and free distribution of production secrets.
c) linked advertising and exclusive territories.
(where the franchisor might require a certain payment from all of the franchisees in a particular area.
d) open market transactions and exclusive territories.
13) When asset specificity is very low and there is no market uncertainty, then it is best for a firm:
a) to buy in the open market.
b) to use a long-term contract.
c) to vertically integrate.
d) to engage in a joint venture.
14) One of the problems of transfer prices comes from the successive impact of the prices as the product moves downstream toward the consumer. At each step the transfer price becomes the ______for the next part of the company.
a) market price
b) total cost
c) marginal cost
d) negotiated price
15) If a corporation operates two divisions that supply one another, and each division is located in a different country, then transfer prices:
a) are set to allocate profit to the low tax rate country.
b) are set to allocate all costs to the low tax rate country.
c) are set to allocate profit to the high tax rate country..
d) are not allowed between most countries.
16) If a company adds up all the costs of producing an intermediate product – direct labor, materials, and overhead – to establish a transfer price, then it is using:
a) market-based transfer prices.
b) marginal cost transfer prices.
c) full-cost transfer prices.
d) success monopoly transfer prices.
17) Holmstrom and Tirole note “The economist’s first instinct is to set transfer price equal to marginal cost.” However, a distinct plurality of companies uses the full-cost method. That is because:
a) most companies do not employ economists.
b) it is simple and has a low cost of implementation.
c) it is identical to using a marginal cost approach to transfer prices.
d) None of the above.
18) In the Celtex case study, Leo Garcia, President of the synthetic chemical division, regularly fails to sell his products to and through the consumer products division. This is because:
a) there is a market-based alternative to his products that are cheaper.
b) Celtex has a faulty organizational structure that regularly cheats Garcia.
c) the head of the consumer products division does not understand the difference between price and value.
d) Garcia produces inferior products.
19) If an employee is paid a fixed wage in a production environment where the wage is independent of output, then the employee has an incentive to:
a) maximize output.
b) shirk.
c) innovate.
d) search for methods to overcome random elements in production.
20) In the TruLite boxing department, management finds that the production team maintains several boxes of lights in a nearby storage closet. On days when the assembly line breaks down, the boxes are added back at the end of day to meet production goals. This is an example of:
a) beating the benchmark.
b) gaming the production system
(Similar to portfolio theory).
c) random elements in production.
d) risk premium adjustment factors.
21) Beyond some minimum level of effort, it usually expected that teamwork will have the impact of ______relative to individual effort.
a) reducing output
b) leaving output the same
c) increasing output
d) None of the above.
22) While production teams are important sources of productivity in business, they can suffer from the ______problem.
a) free rider
b) risk premium
c) standard rating scale
d) benchmark
23) Employees often limit their output and engage in soldiering because of the fear that if they exceed output levels this time, management will increase output goals for the next time period. This is called the:
a) incentive effect
b) ratchet effect
c) benchmark effect
d) goal standard effect
24) If a company wants an employee to average about $14.00 per hour to produce 60 units per hour, plus it provides a base salary of $7.00 per hour, what should be the incentive rate per hour?
a) $0.117
7+60x=14
14-7=60x
60x=7
x=60/7=.117
b) $8.54
c) $0.333
d) $1.25
25) The basic incentive problem is that:
a) owners and employees have similar objectives.
b) owners and employees have fundamentally different objectives.
c) owners and employees need government assistance to solve differences.
d) owners and banks provide funding for growth.
26) When employees are offered incentives to find new customers, but the aggregate economy is so weak (in recession) that the firm loses consumers, then the incentive plan:
a) is just what was needed in hard times.
b) must be adjusted to make employees work harder in difficult times.
c) suffers from the problems of external risks that employees cannot overcome.
d) must be adhered to no matter what.
27) If all issues of effort, output, and pay are fully observable and contractable between an owner and an employee, then:
a) incentive conflicts can be eliminated.
b) incentive conflicts remain intractable.
c) the utility of the employee is unimportant to the outcome.
d) revenues of the firm are independent of employee effort.
28) An efficient allocation of risk among employees and owners must:
a) take into account that performance-based incentives are the sole important component of an employee’s salary.
b) take into account that attitudes toward risk differ among different people.
c) recognize that inefficiency is inherent to the process.
d) recognize that pooling of risks is never appropriate.
29) Compared to owners, employees receive a large fraction of their incomes from their employers and are consequently very dependent on the fortunes of that company in the marketplace. From a ‘risk-sharing’ perspective, an employee tends to prefer
a) a flat salary.
b) output-based incentive pay.
c) year-end based performance pay.
d) None of the above.
30) Dan Heath is the majority owner of Plain Truth Advertising. He hires Shirley Downs as his chief executive officer (CEO). In terms of an economic model, Mr. Heath is the ______and Ms. Downs is the ______.
a) agent, principal.
b) principal, agent.
c) principal, intermediary.
d) Agent, intermediary.
31) FancyFoods provides a monthly bonus for servers when sales volume exceeds 110 percent of the same month last year. The size of bonus is tied to the individual server's sales of meals relative to the average server's sales. This system attempts to introduce a(n):
a) risk-sharing contract.
b) relative performance contract.
c) absolute performance contract.
d) group performance contract.
32) In the benchmark competitive case, the firm will expand the hiring of employees until the:
a) MRP is less than the market wage rate.
b) MRP is equal to the market wage rate.
c) MRP is greater than the market wage rate.
d) MRP is the universe of the market wage rate.
(MR*MP=MRP)
33) The salary gains from specific training in human capital tend to go to:
a) the employing firm, not the individual.
b) the federal government in higher taxes.
c) the individual, not the employing firm.
d) the parents, since they paid the education in the first place.
34) In Mexico, many garment or sewing shops found they could entice many young people to work for them if they offered clean, air conditioned work areas with high-quality locker rooms to clean up in after the work day. Typically, traditional garment shops had to offer ______to get workers to apply for the hard, repetitive, and somewhat dangerous work.
a) benchmark competitive wages
b) compensating differentials
c) monopoly wages
d) wages based on human capital development of each employee
35) The Occupational Safety and Heath Administration attempts to stop safety violations in business through inspections and fines. Though workers are supposed to earn a premium wage for working in more risky environment, why might the OSHA inspections be a good idea?
a) Employees might not have good information about the level of danger.
(Compensating wage differentials theory)
b) Employees may already understand the risks that they are exposed to on the job.
c) Inspections and fines may raise the costs of production significantly.
d) There are never any societal costs (externalities) to dangerous working conditions.
36) All but ONE of the following are lower-cost benefits of an internal labor market.
a) promotion to higher level jobs is restricted to insiders
---is not a benefit------
b) the development of firm specific human capital
c) the cultivation of long term employee motivation
d) management’s ability to learn about employee’s best attributes
37) When a company is very dependent on firm-specific human capital, it makes sense for the company to:
a) use only benchmark competitive wage rates.
b) offer compensating differentials for hardships.
c) develop programs for sending employees to the local university.
d) create a extensive internal labor system for career advancement.
38) In an internal labor market, employees often spend too much time lobbying for promotions or for preferred job assignments. This is called:
a) an administrative cost.
b) market costs.
c) influence costs.
d) human capital costs.
39) For a given compensation potential (isocost curve), an employee with a large family will more likely pick a wage/benefit mix that emphasizes:
a) wages.
b) incentive piece rates.
c) risk averse commission plans.
d) benefits.
40) Cafeteria benefit plans suffer from two defects:
a) Cost of administration and employee decisions