Worksheets 2 & 3 + Unit 2

Question 1

What do the vertical boundaries of a firm refer to?

Answer 1

The activities the firm itself performs versus purchases from independent firms

Question 2

Which of the following processes is most representative of a vertically integrated firm on the “make”
end of the make-or-buy continuum?

Answer 2

Perform activity internally

Question 3

Which of the following processes is most representative of a less integrated firm on the “buy” end of
the make-or-buy continuum?

Answer 3

Arm’s length market transactions

Question 4

Which of the following has a downstream relationship with a Toyota Motor Corporation?

Answer 4

Dealerships

Question 5

The biotechnology industry is seeing a broad pattern of disintegration due to the fact that big pharma
companies are less and less doing which of the following core functions?

Answer 5

Product innovation

Question 6

Which of the following is a true argument regarding the make-or-buy decision process?

Answer 6

Firms should buy, rather than make, in general, because market firms are subject to the discipline of the market and must be efficient and innovative to survive

Question 7

What is a reason that companies might want to “buy” instead of “make” talent from the market when looking to acquire employees with a particular skill set?

Answer 7

Scale economies can result in fixed education costs while in house education methods may be more
expensive

Question 8

What is a market firm?

Answer 8

An independent outsourcing partner

Question 9

What are agency costs?

Answer 9

Costs associated with slack effort and with the administrative controls to deter it

Question 10

Which of the following is a method firms can use to counteract price fluctuations and eliminate
income risk?

Answer 10

Enter into futures contracts to hedge the price of raw materials

Question 11

Which of the following is not a method a firm could use to force vertical foreclosure?

Answer 11

Upstream competitor acquires downstream competitor and then the downstream competitor refuses to buy from other suppliers

Question 12

Which of the following issues makes it difficult for to managers to reign in dedicated “cost centers” in
a firm?

Answer 12

Firms are unwilling to endure the ill will generated by firing unproductive elements in an organization

Question 13

What primary agency cost problem plagued the partnership between Sony’s hardware and software
from 1998-2008 with regards to digital music?

Answer 13

Manager/worker slacking

Question 14

What are influence costs?

Answer 14

The cost of activities aimed at affecting the distribution of benefits in an organization

Question 15

Which of the following is not a characteristic of a complete contract?

Answer 15

The contract allows for a party to exploit weaknesses in another party’s position as the transaction unfolds

Question 16

Suppose you manufacture 10 million hard drives per year specifically for Dell laptop computers.
Suppose your average variable cost C=$20/unit, annualized cost of investment to build a hard drive
factory I=$30 million, and the market price (bailout market price in the event Dell does not buy)
Pm=$22/unit. If Dell agrees to purchase the 10 million hard drives at a price P*
=$25/unit and
subsequently renegotiates to only purchase for $22.50/unit, what has Dell increased its own profits by?

Answer 16

25 million

Question 17

What term best describes how a firm performs based on a comparison to another firm in its peer set
within an industry?

Answer 17

Relative performance

Question 18

What term best describes an agent who is indifferent between a sure thing and a gamble of equal
expected value?

Answer 18

Risk neutral

Question 19

Which of the following management actions reflects agency problems due to the fact that information
held by the agent is hard to observe?

Answer 19

Paying for services that seem excessive to the shareholders

Question 20

Which of the following terms best describes a contract that guarantees an agent some payment, but
provides enough incentive so that the agent does not shirk?

Answer 20

Risk-sharing contract

Question 21

Which of the following is a tool a firm can use to combat agency problems?

Answer 21

monitoring, performance-based incentives, & bureaucracy

Question 22

Which of the following factors is an effective tool for companies to use to mitigate hidden action and
hidden information problems in agency relationships?

Answer 22

Monitoring

Question 23

Which of the following terms describes a contract by which the value of the compensation depends on
the measured performance of the employee?

Answer 23

Pay-for-performance contract

Question 24

What is a key factor in determining how a firm resolves coordination problems?

Answer 24

Organizational structure

Question 25

What is a benefit of the de-centralized organization coordination solution?

Answer 25

Takes advantage of localized information

Question 26

Which of the following terms describes a phenomenon whereby individuals ignore their own
information about the best course of action and instead simply do what everyone else is doing?

Answer 26

Herding

Question 27

What type of organizational structure is typically used in planning courses for an MBA program?

Answer 27

Decentralized

Question 28

What type of performance measurement based process was used to determine Jack Welch’s successor,
Jeffrey Immelt, as CEO of GE?

Answer 28

Promotion tournament

Question 29

Which of the following is an example of a principal/agent relationship?

Answer 29

Company/Hired counsel

Question 30

Herding is best described by which of the following?

Answer 30

Individuals ignore their own information about the best course of action and instead simply do what everyone else is doing

Question 31

Given an employee cost of effort function (where e is given in hours worked per week and each unit
of e produces an extra $100 in sales):
c(e) = 0 if e<=40
(1/3)*(e-40)2 if e>40
What is the cost of effort for a 37 hour week? What is the cost of effort for a 43 hour week? If the firm
offers a salary only job of $500 per week, what is the employee’s payoff net of effort costs for a 49 hour
work week?

Answer 31

$0; $3; $473

Question 32

Given an employee cost of effort function (where e is given in hours worked per week and each unit
of e produces an extra $100 in sales):
c(e) = 0 if e<=40
(1/3)*(e-40)2 if e>40
If the firm offers a salary-plus-commission job of $500 per week plus 20% of sales, how can we write the
employee’s payoff function? What is the employee’s total compensation for working a 46 hour
workweek (Note: This is the compensation and not payoff net of effort costs)?

Answer 32

$500+.20*(100e)-c(e); $1420