Unit 6 - The Firm: Owners, Managers and Employees

Question 1

Extra info :) :

Answer 1

Firms represent a concentration of economic power: said power is placed in the hands of owners or managers. An ‘order’ in the firm is a command.

Question 2

Extra info :) :

Answer 2

Markets are characterized by a decentralization of power: purchases and sales result from the buyers’ and the sellers’ decision. An ‘order’ in a market is a request for a purchase (that can be denied).

Question 3

Define Asymmetric information.

Answer 3

Information that is relevant to the parties in an economic interaction, but is known by some but not by others.

Question 4

What is a Wage Labor?

Answer 4

A system in which producers are paid for the time they work for their employers.

Question 5

Define Relationship-specific or Firm-specific asset.

Answer 5

Something that a person owns or can do that has more value in the individual’s current firm than in their next best alternative.

Question 6

Describe a Residual Claimant.

Answer 6

The person who receives the income left over from a firm or other project after the payment of all contractual costs (for example the cost of hiring workers and paying taxes).

Question 7

Illustrate separation of ownership and control.

Answer 7

The attribute of some firms by which managers are a separate group from the owners. (which is a potential conflict of interest)

Question 8

What is an Incomplete Contract?

Answer 8

A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others).

Question 9

Define “piece-rate work”.

Answer 9

A type of employment in which the worker is paid a fixed amount for each unit of the product made

Question 10

Describe Employment rent.

Answer 10

The economic rent a worker receives when the net value of her job exceeds the net value of her next best alternative (that is, being unemployed).
= cost of job loss

Question 11

How do you correctly calculate employment rent?

Answer 11

employment rent per hour
= wage − reservation wage − disutility of effort
= wage−unemployment benefit−disutility of effort
= $12−$6−$2
= $4

Question 12

What is it that matters most to an employer when it comes to their employees?

Answer 12

An employer will not care as much about how many hours one puts in whereas the amount of effort given (unit of effort)
: effort is the input to the production process
the cost of a unit of effort is w/e (where e units of effort per hour)

Question 13

Define an Efficiency wage.

Answer 13

The payment an employer makes that is higher than an employee’s reservation wage, so as to motivate the employee to provide more effort on the job than he or she would otherwise choose to make.

Question 14

What is an incentive for an employee to choose a high level of effort for a job?

Answer 14

This depends on how much she has to lose (the employment rent), but also the likelihood of losing it.
Which relies on:
- the utility of the things that can be bought with the wage
- the disutility of effort
- the reservation wage
- the probability of getting fired when working at each effort level

Question 15

Define a worker-owned cooperative or a cooperative firm.

Answer 15

A firm that is mostly or entirely owned by its workers, who hire and fire the managers.
= autoinvesteurs / entreprise horizontale

Question 16

Define a Principal-agent relationship.

Answer 16

This relationship exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract.

Question 17

What is a Hidden action problem?

Answer 17

This occurs when some action taken by one party to an exchange is not known or cannot be verified by the other. For example, the employer cannot know (or cannot verify) how hard the worker she has employed is actually working.
Information that is known by one party but not another is asymmetric.