Organizational Economics Exam Practice Tests
Course Introduction
Organizational Economics explores how economic theory and analytical tools are applied to understand the internal structures and processes of organizations. The course investigates topics such as the design of incentives, allocation of authority, contract theory, and mechanisms for reducing information asymmetries within firms. Students will examine why organizations exist, how they are structured, and how their behavior and performance are influenced by economic considerations. Through case studies and theoretical frameworks, the course aims to equip students with practical insights for improving organizational effectiveness and decision-making in both for-profit and non-profit entities.
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Managerial Economics and Organizational Architecture 6th Edition by James Brickley
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Chapter 1: Introduction
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Q1) According to the text,successful firms tend to set up
A)an organizational architecture that is complex and decisions are "top-down."
B)an organizational architecture that is least expensive and decisions are "top-down."
C)an organizational architecture that links decision making with decision rights.
D)an organizational architecture that keeps decision rights reserved for the senior management.
Answer: C
Q2) Is there a relationship between a CEO's retirement and the R&D expenses in a firm?
Answer: There is.In many instances,a CEO reduces R&D expenses a few years before retirement.This boosts earnings in these selected years.If the CEO's bonuses are linked to earnings,then the CEO retires with a big package from reduced R&D,while the firm suffers in the long run due to the failure of keeping up with innovation.
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Chapter 2: Economists View of Behavior
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Q1) George likes skiing and needs one pair of bindings for each pair of skis he owns.George's indifference curves for skies and bindings
A)are approximately L-shaped.
B)are straight lines.
C)slope downward.
D)slope upward.
Answer: A
Q2) ABC Corp.has a bonus plan in place for its CEO,linking her pay to annual earnings.ABC will pay her $180,000 if earnings are high,$90,000 if they are normal,and $0 if they are low.Each event is estimated to have equal probability.Assume the CEO is indifferent between this bonus plan and receiving $75,000 with certainty.Which of the following is true?
A)The CEO's expected bonus is $90,000.
B)The CEO is not willing to give up $15,000 in expected bonuses in order to avoid the risky scheme.
C)$85,000 is the CEO's certainty equivalent for the current bonus plan.
D)The CEO has no clue about risk management.
Answer: A
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Chapter 3: Exchange and Markets
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Q1) Assume the current market price of candles is such that there is a surplus (i.e.,excess supply).Which of the following best describes the adjustment process in a competitive market?
A)As the price increases,the quantity demanded and the quantity supplied decrease.
B)As the price increases,the quantity demanded decreases while the quantity supplied increases.
C)As the price decreases,the quantity demanded increases while the quantity supplied decreases.
D)As the price decreases,the quantity demanded decreases while the quantity supplied increases.
Answer: C
Q2) The minimum wage is a
A)cost ceiling.
B)positive externality.
C)price floor.
D)price ceiling.
Answer: C
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Chapter 4: Demand
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Q1) Analyze the demand function for a dinner at FancyFoods,a restaurant,given the four changes listed below:
(a)The restaurant down the street,Gourmet Meals,features a two-for-one meal special.
(b)The opera provides a coupon offering a 15 percent discount at FancyFoods with each ticket for the 6:00 p.m.show.
(c)Always Round Tire runs a special on tires; a 30 percent reduction in price if you buy four tires.
(d)The main employer in town provides a large increase in salaries for white-collar workers.
Q2) The law of demand states the basic price/quantity relationship of consumption incentives.What does the concept of "price elasticity" add to that knowledge?
Q3) Computer equipment is believed to be a normal good.This means that
A)the quantity of computer equipment consumed decreases as income increases.
B)the income elasticity of demand for computer equipment is negative.
C)the quantity of computer equipment increases as income increases.
D)the quantity of computer equipment increases as income decreases.
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Chapter 5: Production and Cost
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Q1) The curve showing all the combinations of inputs that can be purchased with a given outlay of funds is called a(n)
A)total cost curve.
B)isocost.
C)isoquant.
D)production function.
Q2) The general rule for profit maximization in a firm is to
A)set average cost at its minimum.
B)reduce fixed costs by expanding output.
C)maximize sales revenue.
D)set marginal revenue equal to marginal cost.
Q3) In general,which of the following implies that a marginal cost curve will eventually increase as a firm produces more output?
A)Profit maximizing behavior by the firm
B)A production function displaying increasing returns to scale
C)The law of diminishing returns
D)The law of equimarginal returns
Q4) Can a production function with two factors exhibit increasing returns to scale while at the same time have diminishing returns to each factor?
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Chapter 6: Market Structure
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Q1) Why would precommitment contracts,licenses,learning curve effects,and brand advantages protect an established corporation from new competitors?
Q2) In a monopolistically competitive market,the advantage that a seller has over competitors or newcomers is
A)the consumer preference for its brand.
B)the high price elasticity of demand for its product.
C)the high price elasticity of supply for its product.
D)the licenses or patents it has received.
Q3) Economists tend to focus on one structural aspect of market organization that is more important than the others.It is
A)the number of buyers and sellers.
B)product homogeneity or differentiation.
C)the quality of market information.
D)the entry and exit conditions.
Q4) Under what market structure do we have strategic play?
A)Perfect Competition
B)Monopoly
C)Monopolistic Competition
D)Oligopoly
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Chapter 7: Pricing With Market Power
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Q1) If Tiger Toys faces a demand curve of P = 85 0.25Q and a MC = ATC = 20,then the economic profits would be
A)$130.
B)$6,825.
C)$2,600.
D)$4,225.
Q2) Third-degree price discrimination results when a firm sells
A)its product to every customer at a different price.
B)its product by volume at a different price.
C)every unit at the same price.
D)its product to different groups at different prices.
Q3) Electric generator companies did not raise their prices when there was a huge demand for their products,due to a power shortage.The companies decided against a price rise because they were
A)concerned about being sued by consumer activists.
B)concerned about political backlash.
C)concerned about peoples' welfare.
D)concerned about reputation and future demand.
Q4) Give examples of block pricing,bundling,price discrimination and two-part tariffs.
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Chapter 8: Economics of Strategy: Creating and Capturing
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Q1) Dell Computer attempts to collect information about customers before purchase and assemble customized product for the customers.This process tries to
A)reduce transaction costs for both Dell and the customer.
B)reduce transaction costs for the customers only.
C)increase transaction costs for Dell so that it can reduce taxable profits.
D)increase transaction costs for customers so that IBM can also sell PCs.
Q2) Draw supply and demand curves for a product showing the equilibrium price and quantity.Illustrate what would happen if all the transaction costs in the market for the product were reduced.Generally,what is the impact of transaction costs on market operations?
Q3) Successful invention and innovation in the marketplace
A)can create value and are easy to capture.
B)cannot create value and are difficult to capture.
C)can create value but are often difficult to capture.
D)are not important to most company strategies.
Q4) Beside barriers to entry,what are some of the other reasons for incumbents to maintain their profits?
Q5) What are the key components for creating market power in order to capture value?
Q6) What is the relation between value creation and transactions cost?
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Chapter 9: Economics of Strategy: Game Theory
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Q1) Identify the statement that best defines Nash equilibrium.
A)It is a set of strategies in which a firm does the best it can,given the action of its rival.
B)It is a sequence of actions,where the actions are taken at each node of the game.
C)It is a set of strategies that gives a player the first-mover advantage.
D)It is a sequence of actions that are taken to influence the actions of rivals.
Q2) Sealed bid construction contracts are examples of market games that are
A)simultaneous and nonrepeated.
B)simultaneous and repeated.
C)sequential and nonrepeated.
D)sequential and repeated.
Q3) When there are large network effects of adopting a new technology,firms often feel that government regulation or joint ventures can solve the
A)problem of excessive investment.
B)coordination problem.
C)problem of excess capacity.
D)market inefficiency problem.
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Chapter 10: Incentive Conflicts and Contracts
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Q1) Which one of the following is a source of conflict between owners and managers?
A)The amount owners and the managers want to pay to the shareholders
B)The amount owners and the managers want to receive
C)The amount owners want to pay and the amount managers want to receive
D)The amount owners want to receive and the amount managers want to pay
Q2) What is an agency relationship? What are agency problems?
Q3) Often people in business work in teams,each using specialized knowledge to get the tasks done.If one member of the team does no work,this is called:
A)signaling
B)bargaining
C)free-riding.
D)costless contracting
Q4) Which of the following is true of implicit contracts?
A)Enforcement depends on the private incentives of individuals.
B)Agents do not act in the best interest of principals.
C)The gains from trade are low and there are market failures.
D)The opportunity cost of residual loss is low.
Q5) What is adverse selection? Give an example to illustrate this problem.
Q6) What are some ways of reducing adverse selection in the insurance market?
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Chapter 11: Organizational Architecture
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Q1) Independence Burgers serves fast food at its 300 franchised outlets across the South.The chain has recently found that (a)people are upgrading to restaurants when they eat out,(b)government regulation of beef has been tightened,and (c)modern food preparation technology makes central commissaries more cost effective.What should Independence Burgers do about its organizational architecture?
Q2) Which of the following is a rare occurrence in case of poor performance by a company?
A)Firing a few managers from the senior management
B)Firing the lower level management
C)Firing the middle management
D)Firing the CEO
Q3) Which of the following is an important element of corporate culture?
A)Dress code and political correctness in the work place
B)Proper coordination among employees
C)Effective communication
D)Corporate takeovers to decrease the wealth of shareholders
Q4) What is corporate culture?
Q5) Are organizational changes always needed?
Q6) How is the architecture within firms usually designed?
Q7) How do we solve the incentive problem and design optimal architecture?
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Chapter 12: Decision Rights: the Level of Empowerment
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Q1) Always Round Tire has service stores in many parts of the United States.The stores in Tennessee have petitioned for independent local store managers.The managers claim that since Memphis,Nashville,and Knoxville are hundreds of miles apart,each manager is really in a separate market and needs to deal with local marketing,sales,and pricing issues independently.What issues would need to be considered before giving these local managers the authority that they are requesting?
Q2) What are some of the demerits of decentralization?
Q3) The issue with centralized versus decentralized decision making is that:
A)centralization is always better because one person controls all information.
B)it is difficult to find out whether one is better than the other in the hierarchy.
C)decentralization is always better because many people can split the tasks.
D)it is always easy to find out which is better,but not all may agree.
Q4) Which of the following is an example of excessive influencing activities?
A)Informing the manufacturing division of defects in a shipment
B)Estimating the elasticity of demand for your firm's product
C)Cancelling a meeting with a client to play golf with your superiors
D)Taking clients out for dinner
Q5) Under what conditions will decentralization be beneficial?
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Chapter 13: Decision Rights: Bundling Tasks Into Jobs and Subunits
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Q1) In the BankInc case,the change in assignment for caseworkers was made practical by:
A)centralized functional management systems.
B)computerization of task input for managerial oversight.
C)elimination of cross-training among credit tasks.
D)integrating credit checking with pricing,but maintaining document preparation in a separate department.
Q2) Defense,construction,and management consulting are usually set up as:
A)M forms of business organizations.
B)U forms of business organizations.
C)network designs.
D)matrix designs.
Q3) Dan Unowsky,director of remanufacturing for the Southern division of Enhanced Computers,finds that communication with marketing is very difficult.This is a ______ of separating marketing from production.
A)benefit
B)cost
C)necessary component
D)potential opportunity
Q4) What are the recent trends in organization design?
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Chapter 14: Attracting and Retaining Qualified Employees
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Q1) What roles do human capital and compensating differentials play in shaping the wage that a firm will pay a new employee?
Q2) Human capital is a term that characterizes:
A)the number of workers in a company who are productive.
B)firms that sell their products to customers directly.
C)individuals who buy skills from the companies they work for.
D)individuals with a set of skills that they rent to employers.
Q3) When rates of pay and job assignments are determined by administrative rules and implicit promises of management,then a firm is operating in a(n):
A)internal labor market.
B)competitive labor market.
C)human capital market.
D)risk-sharing market.
Q4) What are efficiency wages and why are they important in internal labor markets?
Q5) One of the benefits of the Hay System is that it can be used to:
A)determine the optimal mix of salary and fringe benefits.
B)determine the level of compensating wage differentials in risky jobs.
C)assign a position to each job within a firm's hierarchy.
D)assign a task to each employee on the basis of seniority.
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Chapter 15: Incentive Compensation
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Q1) Dan Heath is the majority owner of Plain Truth Advertising.He hires Shirley Downs as the 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.
Q2) The rate at which an employer provides an incentive for an employee to perform (to increase effort)is the:
A)informativeness quotient.
B)incentive coefficient.
C)risk-sharing premium.
D)efficient bargaining solution.
Q3) The basic incentive problem is that owners and employees:
A)are both concerned about sales maximization.
B)have fundamentally different objectives.
C)need government assistance to solve differences.
D)generally operate in perfectly competitive markets.
Q4) Why do many firms base incentive pay on group performance?
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Chapter 16: Individual Performance Evaluation
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Q1) Employee performance evaluation is needed because:
A)it justifies the incredibly high wages of the CEOs.
B)it justifies the incredibly high fringe benefits of the CEOs.
C)it minimizes the risks faced by employees for putting in their effort.
D)it determines rewards and sanctions-wages,raises,bonuses,and dismissals.
Q2) In a very basic principal-agent model,output is contractible if:
A)it can be observed with some positive cost.
B)the employee produces many products.
C)the employee works in a team.
D)the employee works independently and cannot game the performance measure.
Q3) If managers at a firm were rewarded for meeting production quota,then:
A)some managers would rebel and not meet the necessary quota.
B)all managers would exceed the quota.
C)all managers would just meet the quota.
D)some managers would just barely exceed the quota.
Q4) Give examples of how government intervention helps reduce moral hazard and adverse selection problems in internal labor markets.
Q5) Make a case for 360-degree performance evaluation based on the informativeness principle.What problems may be encountered from implementation of such a system?
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Chapter 17: Divisional Performance Evaluation
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Q1) The CEO of Always Round Tires has decided to open a battery division.He thinks that batteries would sell well with tires at their outlets and that Always Round's quality reputation will be transferred to the batteries.Should he set up the new division as a Revenue Center,as a Profit Center,or as an Investment Center? Why?
Q2) You can manufacture a product in the US and transfer it to Europe.If the marginal cost (MC)is $3 per unit,and the market price in Europe is $5 per unit,should the product be manufactured?
A)No,because the net receipt of $5 is larger than the MC in the US.
B)Yes,because the gross receipt of $3 is larger than the MC in the US.
C)No,because the net receipt of $3 is the same as the MC in the US.
D)Yes,because the net receipts in Europe will exceed the MC in the US.
Q3) Cost center managers are evaluated on their efficiency in using an input-mix to:
A)produce a stipulated level of output.
B)generate a stipulated amount of revenue.
C)produce a pre-decided level of net profit.
D)generate a certain amount of return on investment.
Q4) What is transfer pricing?
Q5) What are the measures of performance for investment centers? How do they work?
Q6) What are the common transfer pricing methods?
Page 19
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Chapter 18: Corporate Governance
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Q1) Shareholder voting rights should:
A)not be granted to management because of the agency problem.
B)be assigned only to small shareholders.
C)not be assigned to a founder who values control.
D)be assigned to those with residual-claim rights.
Q2) The principle of Economic Darwinism implies that:
A)publicly traded corporations have evolved unsuccessfully through the competitive process and are not here to stay and flourish.
B)publicly traded corporations have evolved successfully through the competitive process but they are not here to stay and flourish.
C)publicly traded corporations have evolved unsuccessfully through the competitive process but will be here to stay and flourish.
D)publicly traded corporations have evolved successfully through the competitive process and are here to stay and flourish.
Q3) Separation of ownership from control clearly expands the potential for principal/agent conflict.Why don't large corporations fail in large numbers because of this conflict?
Q4) What are the shareholder incentives within a corporation?
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Chapter 19: Vertical Integration and Outsourcing
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Q1) AutoCorp is a reputed automobile manufacturer while SUVmart is an independent distributor who buys automobiles from the former.During the current year,SUVmart wants to buy 250 Rhinos from AutoCorp who wants to charge an upfront franchise fee.The franchise fee charged by it:
A)can be anything below MC so as to guarantee SUVmart's profits.
B)can be anything above MC so as to guarantee some profits for AutoCorp.
C)has to be equal to TC so that AutoCorp breaks even on the deal.
D)has to be equal to MC.
Q2) When a firm purchases a part of its supplies from any one of a large number of potential suppliers at the current market price without long-term commitments,it is:
A)making a spot market purchase.
B)practicing arbitrage.
C)integrating upstream.
D)integrating downstream.
Q3) Independent distributors of a brand name product:
A)can commit to provide aftersales service to bulk purchasers.
B)can announce discounts on the product price to improve sales.
C)can increase its marked price to meet shortage of stock.
D)can free-ride on the product's reputation and produce suboptimal sales.
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Chapter 20: Leadership: Motivating Change Within Organizations
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Q1) Logrolling is the:
A)building of a coalition of individuals who support one another's proposals.
B)art of marketing a business proposal with external resources.
C)process of changing the organizational architecture.
D)process of evaluating the performance of the top management.
Q2) The ability of a leader to control the distribution and use of resources inside a corporation provides that leader with:
A)power to declare dividends on company shares.
B)power to introduce change within the organization.
C)the ability to veto voluntary assent to a proposal.
D)the ability to declare all changes emergencies.
Q3) The three issues related to proposal design are:
A)commitment,distribution,and marketing.
B)flexibility,marketing,and distribution.
C)flexibility,commitment,and marketing.
D)flexibility,commitment,and distribution.
Q4) What are the two tasks of good leaders?
Q5) What are the three issues related to proposal design?
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Q6) Why is academic decision making different from decision making within firms?
Chapter 21: Understanding the Business Environment: the Economics of Regulation
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Q1) Which of the following results in the transfer of wealth from consumers to producers?
A)Provision of efficiency wages
B)Licensing of doctors and dentists
C)Provision of compensating wage differentials
D)Internalization of externalities
Q2) Describe the lemons problem.
Q3) The case study in the chapter uses World Motors Corporation (WM).This company,headquartered in Atlanta,is faced with two major regulatory thrusts.One,emission standards,places WM at a competitive disadvantage as its major competitor has an efficient patented emission control device.The second,miles-per-gallon standards,finds WM in the same position as its competitors.Where would WM put its lobbying effort,assuming that conservation groups are currently lobbying strongly for higher emission standards?
Q4) The problem generally associated with public goods is:
A)self-selection.
B)adverse selection.
C)moral hazard.
D)free-riding.
Page 23
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Chapter 22: Ethics and Organizational Architecture
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Q1) Which of the following is true of warranties?
A)They are not important costs in the business world.
B)They leave contracting costs unchanged in the business world.
C)They increase contracting costs in the business world.
D)They reduce contracting costs in the business world.
Q2) Consumer Reports and other organizations rank companies on the quality of their products and the reliability of their services.These companies provide an:
A)incentive for corporate cheating.
B)internal audit function for corporate honesty.
C)insight into the organization's mission and vision.
D)external check for corporate honesty.
Q3) Incentive problems in a business can lead to:
A)wealth maximization.
B)full employment of resources.
C)risk reduction.
D)ethical problems.
Q4) Corporate social responsibility may require changing the mission of the company to a 'constrained' wealth maximization.Is it possible for a few firms in the marketplace to shift their objective functions in this way? Why?
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Chapter 23: Organizational Architecture and the Process of Management Innovation
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Q1) JIT stands for:
A)juried information technology systems.
B)just improved transportation systems.
C)just-in-time production or inventory control systems.
D)justice,integrity,and transcendence in management ethics.
Q2) Provide some examples of management innovations that have lost their popularity.
Q3) Monetary and non-monetary incentives are:
A)basically the same.
B)perfect substitutes.
C)mutually exclusive.
D)not mutually exclusive.
Q4) The text expends considerable effort detailing the reengineering of a hospital.At the end of the case study,the text notes that the changes in process and structure inside the hospital were complementary.In the context of organizational architecture,what does this mean?
Q5) A key factor in TQM is the:
A)reduction of defects.
B)reliance on unskilled workers.
C)reduction in the prices of supplies.
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D)reliance on simple production techniques.
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