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managerial economics
Managerial Economics And Organizational Architecture 7th International Edition Clifford W. Smith, Jerold Zimmerman, James Brickley - Solutions
9. Describe how incentive compensation can be used to cause employees to reveal their private information.
8. Identify the various forms of incentive pay.
7. Discuss the multitask principal agent problem and its implications.
6. Summarize the potential benefits and costs of group incentive compensation plans.
5. Define the informativeness principle.
4. Explain the basic principle-agent model and the associated list of factors that favor high incentive pay.
3. List the important trade-offs in effective compensation plans.
2. Describe optimal risk sharing and how ownership mitigates this incentive problem.
1. Define the basic incentive problem.
14–22. Building on the discussion in Chapter 3 on minimum wage laws, how would you expect a large increase in the minimum wage to affect the pay package (mix between salary and benefits) offered by employers?
14–21. Some companies base promotions solely on seniority. Discuss the negative and positive aspects of such a policy.
14–20.Consider two states that are nearly identical in terms of such factors as income, climate, and population. There are public universities in both states. One state has a law which specifies that all professors of a given rank (assistant, associate, and full professor) have to be paid the
14–19. A recent study found that CEOs in Europe are paid substantially less than CEOs in America, even after controlling for a firm’s size and industry. Does this necessarily imply that American CEOs are overpaid? Explain.
14–18. Marks & Spencer is a large, established British retailer of apparel, housewares, and food products. The company has a large workforce. As part of the company’s benefits package, employees receive a discount of 30 percent off all purchases of apparel.a. What are the advantages and
14–17. People buying disability insurance on an individual basis are often required to take physical exams. Physical exams are typically not required when employees acquire disability insurance through a company-sponsored plan (which covers all employees in the firm).Provide an economic rationale
14–16. Public accounting firms have traditionally paid low starting salaries to new employees.Nevertheless, these firms have been able to hire and retain qualified employees (even though these employees could obtain higher salaries elsewhere). Is this observation inconsistent with economic
14–15. The Good Beer Brewing Company currently purchases health insurance for its 10,000 employees. The company is considering a flexible plan where employees can have either$2,000 in cash or insurance coverage (the insurance costs $2,000). The company figures it will expend the same amount of
14–14. Companies can often gain if they listen to employees about what they prefer in the way of a fringe benefit package—a more preferred package serves to attract and retain employees at a lower cost. Nevertheless, many firms have shunned “menu plans” where each employee would be
14–13. Payments under some retirement plans are based on the average earnings in the last few years of employment. Discuss the potential incentive effects of this policy.
14–12. The University of Medford pays the full tuition for the children of faculty members at any university in the world. Recently, this policy has received bad publicity. The argument has been made that people in other occupations have to pay the tuition costs for their children and so should
14–11. The University of Rochester used to pay all faculty a 10 percent bonus as a substitute for a retirement plan. Individuals could either place this money in a retirement fund or keep the cash. Placing money in the fund deferred taxes on the income until the point of withdrawal. Changes in
14–10. A recent study concluded that many employees fake sickness to avoid going to work. The authors argue that through unwarranted sick leave, employees “steal” about $150 billion a year from firms. This amount is three times larger than the estimated loss from shoplifting. One proposal is
14–9. The Brown Tool Company is a multidivisional firm with offices throughout the country.The company sets the salaries of most of its positions at the central level. For example, secretaries are paid $8 per hour throughout the company. Discuss two important reasons why the firm might adopt such
14–8. The Internal Revenue Code limits the tax deduction for all compensation over $1 million for CEOs unless the pay is tied to company performance. Proponents argue that this rule benefits shareholders. “Everyone knows that CEOs are overpaid and that their pay is not appropriately tied to
14–7. The U.S. Congress has considered proposals that would limit the level of top executive pay to some multiple of the lowest-paid employee in the company (e.g., executive pay must be less than 10 times that of the lowest-paid employee). Do you think this type of proposal is a good idea?
14–6. How do influence costs affect pay within internal labor markets?
14–5. Present an economic argument to explain why firms often have mandatory retirement(where allowed by law).
14–4. Evaluate the following statement: “Firms are free to set salaries in any manner they want in an internal labor market.”
14–3. Why do firms form internal labor markets?
14–2. In the basic competitive model, why do employees pay for general training and firms pay for specific training?
14–1. Explain the following quotation: “My employer doesn’t determine my salary; he determines where I work.”
2. Assume, for the moment, that neither store pays sales commissions. Parkleigh offers an hourly wage plus the employee discount.Macy’s offers only an hourly wage. Do you expect Macy’s hourly wage to be higher or lower than Parkleigh’s? Why?
1. Why do you think the compensation plans differ at the two firms? In particular, why do you think Macy’s pays commissions to salespeople, while Parkleigh does not? Why does Parkleigh offer employees discounts on purchases, while Macy’s does not?
2. What are the advantages and disadvantages of this proposal? What factors should be considered when evaluating the proposal?
1. If this proposal is adopted, what will happen, if anything, to employee salaries? Why?
9. Describe the key factors in choosing the mix between cash compensation and fringe benefits (the composition of the pay package).
8. Understand how job seniority affects wages in internal labor markets.
7. Define the term efficiency wage.
6. Describe the role of internal labor markets.
5. Describe various ways firms learn if they have the wrong level of pay.
4. Define compensating differentials.
3. Define the term human capital and describe the difference between general and specific human capital.
2. Explain how a competitive labor market sets the level of pay.
1. Describe how the firm’s reward system is used to attract and retain qualified employees as well as to motivate them.
13–12. Professors Brickley and Smith are writing two chapters for a new book. Two primary tasks are involved. First, someone has to write each of the chapters. Second, someone has to copyedit the chapters. The second step involves making sure that the writing is good, that there are no
13–11. Stable Inc. is in a relatively stable environment in terms of technology, competition, and regulation. Variance Inc. is in a relatively unstable environment with more frequent changes in technology, competition, and regulation. Both produce the same number of products. Which firm is more
13–10. Evaluate the following statement: “It is usually best to organize as a matrix organization.Matrix organizations combine the best of both worlds, functional excellence and product focus.”
13–9. Many companies are making increased use of telecommuting, which consists of employees working out of their homes, linked to the central office by telephone, computer, and fax machine. Discuss the benefits and costs of telecommuting. What types of occupations are likely to be best suited for
13–8. AutoMart Repair Shop is currently organized as follows: A repair manager meets with the customer to discuss the problems with the car. A repair order is completed. The mechanics specialize in particular types of repairs (e.g., air conditioning, body work, etc.).Typically, a car in the shop
13–7. Johnson & Johnson (J&J) is one of the largest medical products companies in the world.In 1994, it had 33 major lines of business, with 168 operating companies in 53 countries.Decision rights in J&J were quite decentralized. For instance, in 1993, the baby oil manager in Italy ran his own
13–6. In the early 1990s, Chrysler Corporation placed nearly all decisions about the development of a new vehicle in the hands of a single, cross-functional product team. In contrast, General Motors used an approach that placed a stronger emphasis on functional specialties. Small teams were
13–5. Why do you think many U.S. firms have reorganized their international divisions from a country focus to matrix organizations focusing on both country and product?
13–4. Discuss the pluses and minuses of matrix organizations.
13–3. Discuss the circumstances under which you think functional organizations will work best.
13–2. Define the following: functional organizations, product organization, geographic organization, matrix organization, and network organization.
13–1. Discuss the costs and benefits of specialized task assignment relative to broad task assignment. What variables are likely to be particularly important in determining the optimal choice between these two alternatives?
13–2. In the early 1900s, General Motors had separate divisions that manufactured Buicks, Cadillacs, Chevrolets, Oaklands, and Oldsmobiles. Decision rights were highly decentralized, and there was little direction or coordination from the central corporate office. As a result, the divisions often
13–1. For many years, your firm has been protected by patents. Technological change and the introduction of new products have been slow. Soon, these conditions will change. Your patent protection is expiring, and the rate of technological change and innovation has increased substantially. Discuss
3. Which trade-offs does Bagby face in choosing among the country, product, and matrix forms of organizing its international operations?
2. What are the trade-offs between these two methods of grouping wire harness makers into subgroups?
1. What are the trade-offs that Bagby faces in choosing between specialized and broad task assignment?
4. Discuss the pros and cons of the matrix proposal relative to the multidivisional proposal.
3. Jessica Wilde, vice president of product development, suggests that a matrix organization might be better. Draw the organization chart implied by her proposal.
2. Discuss the pros and cons of the proposed reorganization relative to the current structure.
1. The CEO, von Hugel, is considering reorganizing the company as a multidivisional firm organized around customer type. Draw the revised organizational chart.
5. Discuss some recent trends in how firms assign decision rights.
4. Identify matrix, mixed, and network organizations.
3. Explain how changes in the firm’s business environment or strategy can affect subunit structure.
2. Describe the factors that cause firms to group jobs by function, products, or geography.
1. Describe the trade-offs between broad and specialized task assignments.
12–16. Studies of information technology (IT) services consistently show that IT services are organized differently in large versus small firms. Larger firms often locate independent IT centers throughout the firm (e.g., within each product division), where each center maintains its own decision
12–14. Encarta is a multimedia encyclopedia on CD-ROM, which Microsoft produced from 1993 to 2009. It had nine different editions. Examples include editions in British English, American, German, and Italian. The North American version alone had 40 million words and 45,000 articles. Microsoft
12–12. The Colorado Symphony Orchestra (CSO) was formed after the Denver Symphony was no longer financially viable. CSO’s corporate charter requires that it cannot have an operating deficit in any year. Revenues, donations, grants, and other income must equal or exceed operating expenses. CSO
12–10. Several Fortune 100 companies have nominated members of the clergy to be members of their boards of directors. Discuss the advantages and disadvantages of such a proposal.
12–9. It is sometimes argued that empowerment can be successful only if managers learn to live with decisions made by lower-level employees. Managers are to set clear boundaries within which employees can make decisions (e.g., allowing a salesperson to set prices between $15,000 and $20,000).
12–8. It is frequently argued that for empowerment to work, managers must “let go of control”and learn to live with decisions that are made by their subordinates. Evaluate this argument.
12–7. A leading business school currently uses study teams in the MBA program. Each team has five members. Some of the work in the first year is assigned to study teams and graded on a group basis. Discuss the trade-offs involved with enlarging student study groups in the MBA program from five to
12–5. Discuss the positive and negative effects of a university rule that would not allow professors to change a grade once recorded.
12–1. Discuss the costs and benefits of decentralized decision making relative to centralized decision making.
12–2. Traditionally, lending decisions at financial institutions were made by people relatively high up in the organization. For instance, a senior loan officer might have to approve even a small loan. Recently, some financial institutions have decentralized this decision, sometimes to people
12–1. Joan Zimmerman owns a local CPA firm. The company employs 10 CPAs and some additional staff employees. Joan sets her own pay and makes most of the major decisions facing the firm. Joan often initiates new ideas and implements them. The company has no board of directors, and no one is
5. Why did the president appoint a key assistant as secretary of the task force?
4. Does the president want to commit to submitting their proposal to the University’s Board of Trustees or does she want to reserve the right to make modifications? Explain.
3. Why did the president appoint the administrator of the hospital as the chair of the task force?The chair, in turn, has delegated much of the work to subcommittees (a health insurance committee, a retirement committee, and so on).What advice would you offer the chair in appointing subcommittee
2. Should the president anticipate that all members of the task force will strive to cut university expenses? What actions can the president take to increase the likelihood that the task force members have this objective as a major priority?
1. Why did President Kobayashi appoint a task force to consider the issue of fringe benefits?She could have asked the university’s human resources department to design a plan.
2. Team-based production at the nucor is widely regarded as a success. By contrast, the Levi Strauss team-based initiative is widely regarded as a failure. Worker productivity has declined, and employee morale is low. What factors caused the Nucor team-based production to be a success and the Levi
1. In general, what are the advantages and disadvantages of team-based processes?
6. Define influence costs and describe how they can affect the assignment of decision rights within a firm.
5. Compare the differences between decision-management rights and decisioncontrol rights and explain how separating decision management from decision control mitigates agency problems.
4. Understand the costs and benefits of assigning decision rights to teams.
3. Describe the trade-offs between vertical and horizontal (lateral) decision-rights assignments.
2. Describe the costs and benefits of centralization versus decentralization.
1. Explain how jobs vary in their assignment of tasks and decision authority.
11–2. What is a major difference between the architectures of markets and firms?
11–1. Describe the three aspects of organizational architecture.
11–2. Traditionally, many public utility companies (such as telephone and electric companies)have been highly regulated by the government. Thus, they have operated in stable environments, shielded from competition and rapid change. Recently, deregulation has substantially altered the environments
11–1. Suppose that a manager decides that a company’s decision making is too centralized. Will simply delegating more decisions to lower-level employees solve the problem? Explain.
What problems will the firm face in implementing these changes?
If the answers to any of the previous questions suggest a problem, what changes in strategy and architecture should the firm consider?
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