Question: You’re the manager of global opportunities

> Which of the following is an example of adverse selection? a. A safe driver taking greater risk in a rental car than his own car. b. A terminally ill person purchasing life insurance. c. An employment contract encourages little effort on the part of emp

> In which of the following instances would an acquisition make the most sense? a. The target is a very profitable company b. Synergies exist between the acquirer and the target c. Integration costs are low between the two d. Synergy benefits outweigh t

> An insurance company suffers from adverse selection if a. safe customers are less likely to insure than risky customers. b. customers know their willingness to pay for insurance but the company does not. c. a customer takes on much greater risk because h

> Which of the following is a potential solution to the adverse selection problem faced by insurance companies? a. Offer plans with different deductibles so that higher-risk customers accept higher deductibles. b. Create a national database of customers t

> The demand for insurance arises primarily from people who are a. risk-seeking. b. risk-averse. c. risk-neutral. d. None of the above

> Which of the following is not an example of adverse selection? a. A business bets the proceeds of a bank loan on the next NFL game. b. An accident-prone driver buys auto insurance. c. A patient suffering from a terminal disease buys life insurance. d.

> Which of the following can be an example of a signal? a. An air-conditioning manufacturer offers a 50-year warranty. b. A lawyer offers to be paid only if the client wins. c. A student pursues an MBA. d. All of the above

> To combat the problem of adverse selection, ______ informed parties can employ _____ techniques. a. more; signaling b. less; signaling c. equally; screening d. equally; signaling

> An all-you-can-eat buffet attracts two types of customers. Regular customers value the buffet at $20 and eat $5 of food in costs to the restaurant. Hungry customers value the buffet at $40 and eat $10 of food. If there are 100 of each type in the market

> An employer faces two types of employees. Regular workers are 70% of the population and generate $100,000 in productivity. Exceptional workers are 30% of the population, and generate $120,000 in productivity. Employees know their types, and reject salari

> An insurance company offers doctors malpractice insurance. Assume that malpractice claims against careful doctors cost $5,000 on average over the term of the policy and settling malpractice claims against reckless doctors costs $30,000. Doctors are risk-

> Which of the following is true about moral hazard? a. Moral hazard arises from actions that cannot be observed. b. Shirking is a form of moral hazard. c. Moral hazard refers to the taking of excessive risk. d. All of the above

> Why are contact lens manufacturers reluctant to sell their lenses through the Internet? a. The Internet price is too high due to double marginalization b. Search costs are lower, so the Internet sales are too competitive c. Doing so reduces the incentive

> Loan applications require a lot of information from applicants to avoid a. moral hazard. b. adverse selection. c. free riding. d. None of the above

> Restrictive covenants on loans are used to avoid a. moral hazard. b. adverse selection. c. free riding. d. None of the above

> Which of the following is true? a. Moral hazard is primarily an issue prior to a transaction. b. Adverse selection is primarily an issue after a transaction. c. Moral hazard is the result of an information asymmetry. d. Resolving adverse selection also

> Which of the following is not an example of moral hazard? a. People are more likely to lock their own car than a rental car. b. Skateboarders attempt more difficult maneuvers when wearing a helmet. c. Bad salespeople are less drawn to commission-based j

> You are taking a multiple-choice test that awards you one point for a correct answer and penalizes you 0.25 points for an incorrect answer. If you have to make a random guess and there are five possible answers, what is the expected value of guessing? a.

> For threats or commitments to be effective, they must be a. irrational. b. profitable. c. credible. d. None of the above.

> The prisoners’ dilemma is an example of a. a sequential game b. a simultaneous game. c. a shirking game. d. a dating game.

> On average, if demand is unknown and costs of underpricing are _______ than the costs of overpricing, then _________. a. smaller; overprice b. smaller; underprice c. larger; underprice d. None of the above

> Which of the following is an example of moral hazard? a. High-quality products being driven out of a market by low-quality products. b. A local charity raising insufficient funds because no one contributes, expecting that their neighbors will. c. A bake

> After running a promotional campaign, the owners of a local hardware store decided to decrease the prices for the advertised prices sold in their store. One can infer that a. the promotional expenditures made the demand for the advertised products more e

> A firm started advertising its product and this changed the product’s elasticity from -2 to -1.5. The firm should a. raise price from $10 to $15. b. reduce price from $15 to $10. c. raise price from $7.5 to $10. d. reduce price from $10 to $7.5.

> For products like parking lots and hotels, costs of building capacity are mostly fixed or sunk and firms in this industry typically face capacity constraints. Therefore, a. if MR>MC at capacity, then the firms should price to fill capacity. b. if MRLRM

> Firms tend to raise the price of their goods after acquiring a firm that sells a substitute good because a. they lose market power. b. there is an increase in the overall demand for their products. c. the aggregate demand for both goods is more elastic

> After firm A producing one good acquired another firm B producing another good, it lowered the prices for both goods. One can conclude that the goods were a. substitutes. b. complements. c. not related. d. None of the above

> A shoe-producing firm decides to acquire a firm that produces shoe laces. This implies that the firm’s aggregate demand (shoes + laces) will be: a. less elastic than the individual demands. b. more elastic than the individual demands. c. equally elastic

> A firm that acquires a substitute product can reduce cannibalization by a. doing nothing. b. repositioning a product so that it does not directly compete with the substitute. c. setting the same price on both products. d. lowering prices on the low-ma

> All of the following choices are examples of promoting a firm’s product, except a. celebrity endorsements. b. pricing c. discount coupons. d. end-of-aisle displays.

> After massive promotion of Rihanna’s latest music album, the producers reacted by raising prices for her albums. This implies that promotion expenditures made the album demand a. more elastic. b. unitary elastic. c. change due to psychological pricing.

> A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare a. the total benefits gained from the two factories to the total costs of running the two factories. b. the incre

> Which of the following is not an example of a process designed to combat moral hazard problems? a. Banks include restrictive covenants in loan agreements. b. Universities have student’s complete evaluations of professor performance at the end of a class.

> Total costs increase from $1500 to $1800 when a firm increases output from 40 to 50 units. Which of the following is true if MC is constant? a. FC = $100 b. FC = $200 c. FC = $300 d. FC = $400

> A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly and they costs $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250. How d

> Managers undertake an investment only if a. Marginal benefits of the investment are greater than zero b. MCs of the investment are greater than marginal benefits of the investment c. Marginal benefits are greater than MCs d. Investment decisions do not

> When economists speak of “marginal”, they mean a. opportunity b. scarcity c. incremental d. unimportant

> In the short run, a firm’s decision to shut down should not take into consideration a. avoidable costs. b. variable costs. c. fixed costs. d. MCs

> Break-even quantity is a point where a. the level of profit is maximized. b. the level of cost is minimized. c. only variable costs are covered. d. there are zero profits.

> If GDP is expected to increase at a steady rate of 3% per year, how many years would it take for living standards to double? a. 10 b. 20 c. 24 d. 30

> You are considering opening a new business to sell dartboards. You estimate that your manufacturing equipment will cost $100,000, facility updates will cost $250,000, and on average it will cost you $80 (in labor and material) to produce a board. If yo

> You expect to sell 500 cell phones a month, which have an MC of $50. If your fixed costs are $5,000 per month, what is the break-even price? a. $10 b. $50 c. $60 d. $100

> What is the net present value of a project that requires a $100 investment today and returns $50 at the end of the first year and $80 at the end of the second year? Assume a discount rate of 10%. a. $10.52 b. $11.57 c. $18.18 d. $30.00

> A salesperson can put in regular effort (resulting in a 40% chance of sale) or high effort (60% chance of sale). If high effort costs the salesperson $20 more than regular effort, how large a per-sale bonus is required to encourage high effort? a. $12 b

> Sarah’s Machinery Company is deciding to dump their current technology A for a new technology B with smaller fixed costs but bigger MCs. The current technology has fixed costs of $500 and MCs of $50 whereas the new technology has fixed costs of $250 and

> Assume a firm has the following cost and revenue characteristics at its current level of output: price=$10.00, average variable cost=$8.00 and average fixed cost =$4.00. This firm is a. incurring a loss of $2.00 per unit and should shut down. b. realizi

> The higher the discount rates a. the more value individuals place on future dollars b. the more value individuals place on current dollars c. the more investments will take place d. Does not affect the investment strategy

> Which of the following will increase the break-even quantity? a. A decrease in overall fixed costs b. A decrease in the marginal costs c. A decrease in the price level d. An increase in price level

> An individual’s value for a good or service is a. The amount of money he or she used to pay for a good. b. The amount of money he or she is willing to pay for it. c. The amount of money he or she has to spend on goods. d. None of the above

> Suppose the herbicide manufacturer mentioned in the chapter can vertically integrate only into home gardening retailing. Would this allow the manufacturer to price discriminate?

> Stores that sell wedding dresses do not typically permit photos, and do not have tags in the dresses that would identify the manufacturer and style type. What is the purpose of these rules? Suggest one other way of accomplishing the same objective.

> Australian cosmetics maker, Eternal Beauty Products, pressures online retailers to either sell goods at prices charged by brick and mortar stores or risk being cutoff. If online retailers are paying the same wholesale prices, why would Eternal not want o

> State utility commissions typically regulate local phone companies, but local phone companies also offer long-distance service to their customers. Rival long-distance carriers also connect to local phone lines to provide long-distance service to customer

> In a bad economy, a CEO has a 4% chance of meeting earnings estimates at regular effort, and a 5% chance at extraordinary effort. Extraordinary effort costs the CEO $10,000. How large a bonus should the CEO be paid for meeting estimates to encourage extr

> Intel made large loyalty payments to HP in exchange for HP buying most of their chips from Intel instead of rival AMD. AMD sued Intel under the antitrust laws, and Intel settled the case by paying $1.25 billion to AMD. What incentive conflict was being c

> Under a proposed healthcare reform, doctors’ fees will be capped at 80% of their current rate, but doctors can order blood tests that will be reimbursed at 90% of the current rate. How does vertical integration of physician groups into testing services i

> Futura Furniture Products manufactures upscale office furniture for the “Office of the Future.” The sales division comprises regionally based sales offices made up of sales representatives and regional managers. Sales representatives—who report to the re

> Discuss the advantages and disadvantages of using divisional profit as the basis of incentive compensation for division managers compared to using company profit as the basis.

> Your local fast food chain with two dozen stores uses the company’s internal corporate marketing department to produce signage, print ads, in-store displays, and so forth. When placing an order, store managers are assessed a chargeback (transfer price) t

> List three reasons why might it be a bad idea to have corporate headquarters set transfer prices.

> This problem is mentioned in the text (see the section on “Organizational Alternatives”). Your task is to propose an organizational solution. To briefly recap, a manufacturer is trying to design the next generation of turbine engines for jet airplanes. T

> Suppose that a paper mill “feeds” a downstream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume. For example, the first unit of boxes increases earnings by $10, the second $9, the third $8, and so on,

> Venture capital (VC) firms are pools of private capital that typically invest in small, fast-growing companies, which usually can’t raise funds through other means. In exchange for this financing, the VCs receive a share of the company’s equity, and the

> Each year, public schools are rewarded with bigger budgets for achieving a rating of “excellent” or “recommended” and are punished for rating “needs improvement.” These ratings are based on meeting thresholds on a broad set of measures such as attendance

> Which of the following is an example of moral hazard? a. Reckless drivers are the ones most likely to buy automobile insurance. b. Retail stores located in high-crime areas tend to buy theft insurance more often than stores located in low-crime areas. c.

> Planes frequently push back from the gate on time, but then wait 2 feet away from the gate until it is time to queue up for take-off. This increases fuel consumption, and increases the time that passengers must sit in a cramped plane awaiting take-off. W

> When real estate agents sell their own, rather than clients’, houses, they leave the houses on the market for a longer time (10 days longer on average) and wind up with better prices (2% higher on average). Why?

> A convenience store manager earns a base salary plus small bonuses for each of ten different possible monthly milestones he meets. Typical managers can meet half of these milestones. Do they miss the others by a little or a lot?

> Which of the following are characteristic of principal-agent conflicts that often exist in a firm? a. Managers do not always operate in the best interest of owners because owners are generally more risk averse than managers. b. Managers generally have a

> Frequent flyer programs are targeted more toward business travelers (who do not pay for their own tickets) than leisure travelers (who do). Explain their effect on each type of traveler. Why is there a difference?

> BPO Services is in the business of digitizing information from forms that are filled out by hand. In 2006, a big client gave BPO a distribution of the forms that it digitized in house last year, and BPO estimated how much it would cost to digitize each f

> Suppose that every driver faces a 1% probability of an automobile accident every year. An accident will, on average, cost each driver $10,000. Suppose there are two types of individuals: those with $60,000 in the bank and those with $5,000 in the bank.

> Lightweight personal locator beacons are now available to hikers that make it easier for the Forest Service’s rescue teams to locate those lost or in trouble in the wilderness. How will this affect the costs that the Forest Service incurs?

> A colleague tells you that he can get a business loan from the bank, but the rates seem very high for what your colleague considers a low risk loan. a. Give an adverse selection explanation for this, and offer advice to your friend on how to solve the pr

> Your product fails about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. Would you want to price the extended warranty at 2% of the product price? Discuss both moral h

> In the magazine Budget Travel, a hotel maid admits, “I cut corners everywhere I could. Instead of vacuuming, I found that just picking up the larger crumbs from the carpet would do. Rather than scrub the tub with hot water, sometimes it was just a spray-

> Which of the following is an example of vertical integration? a. A custom software company purchasing a competing software firm b. A soft drink producer buying a brand of iced tea c. A coal producer purchasing a nuclear power plant d. A gourmet cheese co

> Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose you’re trying to sell a company a new accounting system that will reduce costs by 10%.

> When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction. The bids for the jobs consisted of promises of future profit streams that the managers would generate and then deliver to th

> Many police officer positions require the applicant to have a college degree even though the tasks of a police officer rarely call upon college course material. Why don’t police departments increase their applicant pool by dropping this requirement?

> In the late 1990s, car leasing was very popular in the United States. A customer would lease a car from the manufacturer for a set term, usually two years, and then have the option of keeping the car. If the customer decided to keep the car, the customer

> You need to hire some new employees to staff your start-up venture. You know that potential employees are distributed throughout the population as follows, but you can’t distinguish among them: Employee Value Probability $50,000 0.25 $60,000 0.2

> You sell bicycle theft insurance. If bicycle owners do not know whether they are high- or low-risk consumers, is there an adverse selection problem?

> Moe Green estimates the cost of future projects for a large contracting firm. Mr. Green uses precisely the same techniques to estimate the costs of every potential job, and formulates bids by adding a standard profit markup. For some companies to whom th

> When a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, representatives of other museums that have no chance of winning are actively wooed by the auctioneer to attend anyway. Why?

> In Sweden, firms that fail to meet their debt obligations are immediately auctioned off to the highest bidder. (There is no reorganization through Chapter 11 bankruptcy.) The current managers are often the high bidders for the company. Why?

> Consider the problem above, but now each bidder has a value of either $60 or $80. What reserve price should the auctioneer set, and what is the expected revenue from auctioning the item with and without a reserve price?

> You own a retail establishment run by a store manager who receives a flat salary of $80,000. If you set up another store as a franchise with incentive compensation to the franchisee, what would be a reasonable total compensation range that the franchisee

> A reserve price is a minimum price set by the auctioneer. If no bidder is willing to pay the reserve price, the item is unsold at a profit of $0 for the auctioneer. If only one bidder values the item at or above the reserve price, that bidder pays the re

> You hold an auction among three bidders. You estimate that each bidder has a value of either $16 or $20 for the item, and you attach probabilities to each value of 50%. What is the expected price? If two of the three bidders collude, what is the price?

> You are offered the following gamble based on coin flips. If the first heads occurs on the first flip, you get $2. If the first heads occurs on the second flip you get $4, and so on so that if the first head is on the Nth flip, you get $2N. The game cont

> To test the effectiveness of a two Web advertising agencies, you increase your ad purchase with agency A by 50% without changing your purchase through agency B. The referrals to your website from agency A increased by only 34% but the referrals from agen

> In the final round of a TV game show, contestants have a chance to increase their current winnings of $1 million dollars to $2 million dollars. If they are wrong, their prize is decreased to $500,000. The contestant thinks his guess will be right 50% of

> The HR department is trying to fill a vacant position for a job with a small talent pool. Valid applications arrive every week or so, and the applicants all seem to bring different levels of expertise. For each applicant, the HR manager gathers informati

> Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company could keep it in inventory for a possible future product and estimates that the reservation value is $250,0

> Robert G. Flanders Jr., the state-appointed receiver for Central Falls, RI, said his city’s declaration of bankruptcy had proved invaluable in helping it cut costs. Before the city declared bankruptcy, he said, he had found it impossible to wring meaning

> You’ve entered into a contract to purchase a new house, and the closing is scheduled for next week. It’s typical for some last-minute bargaining to occur at the closing table, where sellers often try to tack on extra fees. You have three options for the

> American Airlines and British Airways are proposing to merge. If British pilots and American pilots are represented by different unions, how would this merger affect airline costs?

> A firm faces two kinds of employees, those able to sell 10 units/year, and those able to sell 5 units/year. High-productivity employees are willing to work for $100/year while low-productivity employees are willing to work for only $50/year. To screen ou

> Two equal-sized newspapers have overlap circulation of 10% (10% of the subscribers subscribe to both newspapers). Advertisers are willing to pay $10 to advertise in one newspaper but only $19 to advertise in both, because they’re unwilling to pay twice t