Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. Statement 1: “Employees at an automotive repair center are found to be exaggerating the amount of repairs that cars need. According to the ‘happy-is-productive’ approach, it is likely that these employees are being paid based on commission and have to much reward for misleading customers about needed repairs.” Statement 2: “Since the economist’s view of behavior suggests that employees are exclusively interested in monetary rewards, it is unlikely that an employee’s preference for telling the truth would be considered when analyzing why automotive repair workers would exaggerate the amount of repair cars need.” a. Both statements are true b. Both statements are false c. Statement 1 is true, but 2 is false d. Statement 2 is true, but 1 is false ____ 2. Employees in a factory are found to be less productive than their counterparts elsewhere. A consultant is brought in to analyze the problem and suggests that managers send out surveys to all workers that assess what bothers them most about their circumstances on the job. Which of the following theories of worker behavior is most likely being used by this consultant? a. The economic view of behavior b. The only money matters view of behavior c. The happy-is-productive view of behavior d. The product-of-the-environment view of behavior e. The good citizen model ____ 3. Statement 1: “When management professors use the term ‘strategy’ they typical refer to the way one firm’s decisions cause other firms to alter their behavior.” Statement 2: “The concept of the ‘long run’ as used in microeconomics is not a period of time. In fact, in some cases it may be as short as a few months while in others it might last for a decade or two.” a. Both statements are false b. Both statements are true c. Statement 1 is true but 2 is false d. Statement 2 is true but 1 is false ____ 4. Which of the following is not a method of creating value as described in the Brickley, Smith and Zimmerman (BSZ) text? a. Reducing the time it take consumers to identify product characteristics. b. Reducing the costs of negotiation when purchasing your firm’s product. c. Improving product quality. d. Increasing the price of complementary products. e. All of the above methods are devices for a firm to create value as described in the BSZ textbook. ____ 6. Statement 1: “There is always a single non-cooperative Nash equilibrium in a simultaneous choice game.” Statement 2: “Suppose that Alice can pick one of three strategies in a two-player, simultaneous choice game. Call the strategies A, B, and C. If Strategy B is better for Alice than strategy A for every possible choice of her opponent, then we say that strategy A is a ‘dominated strategy’.” a. Both statements are true b. Both statements are false c. Statement 1 is true, but 2 is false d. Statement 2 is true, but 1 is false ____ 7. Statement 1:.

1. Multiple Choice
Identify the letter of the choice that best completes the
statement or answers the question.
____ 1. Statement 1: “Employees at an automotive repair
center are found to be exaggerating the amount of repairs that
cars need. According to the ‘happy-is-productive’ approach, it
is likely that these employees are being paid based on
commission and have to much reward for misleading customers
about needed repairs.”
Statement 2: “Since the economist’s view of behavior suggests
that employees are exclusively interested in monetary rewards,
it is unlikely that an employee’s preference for telling the truth
would be considered when analyzing why automotive repair
workers would exaggerate the amount of repair cars need.”
a.
Both statements are true
b.
Both statements are false
c.
Statement 1 is true, but 2 is false
d.
Statement 2 is true, but 1 is false
____ 2. Employees in a factory are found to be less
productive than their counterparts elsewhere. A consultant is
brought in to analyze the problem and suggests that managers
send out surveys to all workers that assess what bothers them
most about their circumstances on the job. Which of the
following theories of worker behavior is most likely being used
by this consultant?

2. a.
The economic view of behavior
b.
The only money matters view of behavior
c.
The happy-is-productive view of behavior
d.
The product-of-the-environment view of behavior
e.
The good citizen model
____ 3. Statement 1: “When management professors use the
term ‘strategy’ they typical refer to the way one firm’s
decisions cause other firms to alter their behavior.”
Statement 2: “The concept of the ‘long run’ as used in
microeconomics is not a period of time. In fact, in some cases
it may be as short as a few months while in others it might last
for a decade or two.”
a.
Both statements are false
b.
Both statements are true
c.
Statement 1 is true but 2 is false
d.
Statement 2 is true but 1 is false
____ 4. Which of the following is not a method of creating
value as described in the Brickley, Smith and Zimmerman
(BSZ) text?

3. a.
Reducing the time it take consumers to identify product
characteristics.
b.
Reducing the costs of negotiation when purchasing your firm’s
product.
c.
Improving product quality.
d.
Increasing the price of complementary products.
e.
All of the above methods are devices for a firm to create value
as described in the BSZ textbook.
____ 6. Statement 1: “There is always a single non-
cooperative Nash equilibrium in a simultaneous choice game.”
Statement 2: “Suppose that Alice can pick one of three
strategies in a two-player, simultaneous choice game. Call the
strategies A, B, and C. If Strategy B is better for Alice than
strategy A for every possible choice of her opponent, then we
say that strategy A is a ‘dominated strategy’.”
a.
Both statements are true
b.
Both statements are false
c.
Statement 1 is true, but 2 is false
d.
Statement 2 is true, but 1 is false

4. ____ 7. Statement 1: “Sam works in an office which has what
he thinks is the best view of the Pacific ocean anyone ever had.
In fact, this is common at his firm because of the ocean side
location of his employer’s location. Unfortunately, Sam and
others at his firm get paid less than others with similar skills in
their industry. This is an example of what economists call the
theory of compensating differentials.”
Statement 2: “Sam’s firm hire new employees when they
graduate from college, and promotes people internally to all
senior positions. This approach to hiring employees is call the
‘efficiency wage’ approach by economists.”
a.
Both statements are true
b.
Both statements are false
c.
Statement 1 is true, but 2 is false
d.
Statement 2 is true, but 1 is false
____ 8. Statement 1: “Firms that use internal labor markets
are more likely to have problems getting employees to invest in
firm specific human capital.”
Statement 2: “Firms that pay employees using the ‘efficiency
wage’ approach are likely to have higher rates of employer
turnover.”
a.
Both statements are true
b.
Both statements are false

5. c.
Statement 1 is true, but 2 is false
d.
Statement 2 is true, but 1 is false
____ 9. Statement 1: “When economists discuss the most
profitable combination of fringe benefits and salary, the general
strategy is to try and make employees as happy as they can be
for a given amount spent on them.”
Statement 2: “Bob runs a guitar store and is considering
reducing pay to employees in the store, but giving them
substantial discounts on the purchase of guitars in the store.
Most of his employees are guitar enthusiasts. Economists
would regard this move as an obviously bad move because
employees will clearly prefer the salary to this particular fringe
benefit.”
a.
Both statements are true
b.
Both statements are false
c.
Statement 1 is true, but 2 is false
d.
Statement 2 is true, but 1 is false
____ 10. Which of the following is not an advantage of
internal labor markets?
a.
Employees tend to accumulate more skills that are valuable only
at this firm.

6. b.
There is less incentive for employees to say bad things about
the firm to outsiders
c.
Managers often know a great deal about employees when
considering promotions
d.
There is better access to employees of all skill types than is
available to other types of firms.
____ 11. Statement 1: “Economists believe that all firms use
some form of incentive pay.”
Statement 2: “Economists suggest that incentive pay can
increase employee effort, but is often very expensive for firms
to use as employees must be compensated for the extra risk.
a.
Both statements are true
b.
Both statements are false
c.
Statement 1 is true, but 2 is false
d.
Statement 2 is true, but 1 is false
____ 12. Which of the following does not limit the use of
employee ownership of the firm to correct incentives to work
hard in the firm?
a.
Significant wealth constraints that prevent employees from
purchasing part of ownership through a franchise or some
similar device.

7. b.
Employee aversion to risk.
c.
Team production can make it difficult to separate the
contributions of individual team members to profit.
d.
All of the above limit the usefulness of employee ownership
devices to correct incentives in the firm.
____ 13. Statement 1: “Employee effort increase the amount of
goods and services produced by the firm. Therefore, managers
should try to get the greatest amount of effort possible out of
their employees.”
Statement 2: “If the firm’s compensation scheme was chosen
entirely for optimal risk sharing, the stockholders would bear
all of the profit risk, and the employees would be paid a straight
salary.”
a.
Both statements are true.
b.
Both statements are false.
c.
Statement 1 is true, but 2 is false.
d.
Statement 2 is true, but 1 is false.
____ 14. Statement 1: “Incentive pay is always desirable...at
least if you talk to economists. They argue that rewarding
employers for increased productivity will always increase the
firm’s profitability.”

8. Statement 2: “The most profitable amount of effort from a
firm’s employee occurs when the gain in revenue from the extra
output produced by that effort, is matched by the extra money
that must be paid to them to keep them at your firm.”
a.
Statement 1 is true, but 2 is false
b.
Statement 2 is true, but 1 is false
c.
Both statements are true
d.
Both statements are false
____ 15. If you worry only about optimal sharing of risks
between stockholders, management and labor, then which of the
following is true?
a.
No incentive pay should be used allowing Stock holders to
absorb all the risk.
b.
Stock options should be paid to management so that they will be
more concerned about the firm’s profitability.
c.
Incentive pay should be paid to labor so that they have incentive
to increase productivity.
d.
Incentive pay should be paid to both labor and management to
increase both profitability and productivity.
____ 16. Suppose that over the summer you forget much of
what you learned in your managerial economics class. Which of
the following phrases best describes this forgetfulness in the

9. language of economics?
a.
You are investing in your human capital.
b.
Your human capital is depreciating
c.
You are dis-investing in specific human capital
d.
None of the above phrases would be used...even by goofy
economists.
____ 17. Statement 1: “Some jobs are pleasant so they can pay
their employees more. This is an example of the concept
economists call ‘compensating differentials.’”
Statement 2: “Some jobs are less pleasant so firms must pay
employees more. This is an example of the concept economists
call ‘compensating differentials.’”
a.
Statement 1 is true, but 2 is false
b.
Statement 2 is true, but 1 is false
c.
Both statements are true
d.
Both statements are false
____ 18. Statement 1: “Firms that pay efficiency wages have
lower turnover, and absenteeism. All firms should pursue this
strategy.”
Statement 2: “Firms that use internal labor markets are less

10. likely to have employees that accumulate firm specific human
capital.”
a.
Statement 1 is true, but 2 is not
b.
Statement 2 is true, but 1 is not
c.
Both statements are true
d.
Both statements are false
____ 19. Bob and Alice are playing the sequential game drawn
below. Bob moves first and picks either A or B. Alice moves
second and picks either C or D.
Which of the following statements best describes the situation
in this game?
a.
Bob has a big first mover advantage.
b.
Alice has a big second mover advantage.
c.
The game should be solved by examining Bob’s decision before
looking at Alice’s decision since he moves first.
d.
None of the above are true statements about the situation
described in this game.
____ 20. You work for BigFatFridgeCo. The firm would like
to use create value for its customers so that it can increase its

11. profitability. It has chosen to do this by lowering what
economists call “consumer borne transactions costs.” Which of
the following would notreduce consumer borne transactions
costs?
a.
Making it easier for consumers to buy the product on the
Internet.
b.
Making it easier for consumers to get information about the
product.
c.
Insisting that customers negotiate over price prior to purchase.
d.
Making it easier for customers to get the product from the store
to their home.
____ 21. Wal-Mart significantly upgraded its web-site in 1999
to get a significant increase in its Internet sales. Which of the
following statements hypothetically made in 1999 would be the
most persuasive argument that profit for Wal Mart would
increase over a large number of years?
a.
The web site would be valuable to customers because they could
shop from home and didn’t need to drive to the store.
b.
The web site would be well organized and things would be easy
to find.
c.
The web site would use the best and most recent technical tricks
to display products.
d.
The Wal-Mart web-site would allow the firm to ship items to
bulky for UPS and US mail from local Wal-Mart stores using
the inexpensive shipping system that Wal Mart already had

12. developed.
____ 22. Suppose that productivity is low at your firm and a
consultant suggests that you should send out employee
satisfaction surveys to all employees to identify the source of
the problem. Which of the following theories of workers is
most like to be followed by this consultant?
a.
The happy is productive theory
b.
The good citizen model.
c.
The economists view of behavior
d.
The product of the environment model
Essay
23. Fred has been running BlamCo--a maker of curiously
cute handmade stuffed animals--for the last 10 years. One
portion of the production process involves employees that sew
together the animals leaving open an hole to stuff them.
Another has employees stuffing the animals, and a final stage
has employees packaging the finished products. The three
groups of employees are called Sewers, Stuffers, and Packagers.
Fred would like to pay them using a piece-work pay system
based on the number of animals sewed, stuffed, or packaged by
each employee. To keep costs under control, he plans to lower
employee salaries, but he figures that with levels of effort
comparable to what he is used to seeing from them, they could
earn about the same amount of money as they did in the past.

13. Using material from class and the text, discuss the advantages
and disadvantages of using piece-work pay in this situation.
24. Allen-Edmonds Shoe Company manufactures
expensive shoes. For many years it paid workers using a piece
rate system, but in 1990 it switched to a system of fixed hourly
wages. Use concepts developed in class to discuss the likely
benefits and costs to Edmonds coming from this change over.
Make a recommendation for or against switching to hourly
wages based on class concepts.
25. Enterprise rent-a-car uses the internal labor market
approach to hiring new employees. Many other firms do not use
this approach. Assuming that Enterprise has chosen the
appropriate model for their purposes explain why other firms
would not want to use this approach. What would be different
about firms that are better off not using the internal labor
market approach?
1. In the simultaneous choice game below Frank has 5
choices (A, B, C, D, and E) while Bob has 2 choices (A and B).
If this game is non-cooperative, what is the likely outcome?
Use concepts presented in class.
a.
Bob picks B, Frank picks A
b.
Bob picks B, Frank picks E

14. c.
Bob picks A, Frank picks B
d.
Bob picks A, Frank picks D
e.
None of the above answers is correct.
3. In the game drawn below, Bob moves first and must
pick either A or B. Mary moves second and has three choices
that are labeled D, E and F (if Bob chose A) and G, H and I (if
Bob chose B). The numbers at the far right are the rewards for
Bob and Mary in each of the 6 possible outcomes. What is the
likely outcome of this game if both Bob and Mary play
optimally?
a.
Bob will pick B and Mary will pick G
b.
Bob will pick A and Mary will pick F
c.
Bob will pick A and Mary will pick D
d.
Bob will pick B and Mary will pick H
e.
None of the above answers is correct.
Essay Questions:

15. 1. In some sequential games it is an advantage to move first,
while in others it is better to move second. Provide a clear
example of each and intuitively identify why there is an
advantage to move first or second. Write your entire answer
within the box below.
2. “For the last 10 years you’ve been working in the health
food business. You have talked to many customers who have
suggested a new restaurant concept. The restaurant would
feature a variety of low calorie meals (under 500) made from
healthy ingredients (e.g., organic fruits and vegetables and
steroid/hormone free meat). The restaurant would include a bar
with an extensive organic wine list and trendy décor. There
would be an emphasis on high quality, friendly service, and
colorful meal presentation. Your customers suggest that they
would be willing to pay around $50 to eat a meal and have a
glass of wine at this type of restaurant. They lament the fact
that their community has no upscale restaurants that offer this
type of fare. [..Some text has been removed…]
Several friends with MBA’s argue that you would be crazy
to start this business. They claim that there are few entry
barriers to the restaurant industry and that ‘every person with
business training knows you can’t make money in a competitive
industry. Should you drop the idea of opening this business
based on this argument?”[footnoteRef:1] Explain using
concepts discussed in class and in the text. Your answer should
be contained completely in the box below. [1: Brickley, Smith,
and Zimmerman; Managerial Economics and Organization
Architecture, fifth edition, 2009, McGraw Hill-Irwin, p. 256.]
BobABAliceCDBob gets $250Alice loses $250Bob loses
$500Alice gets $500Bob gets $500,Alice loses $500
10*, 4**15*, 16**10*, 14**10*, 15**12*, 30**Bob: B
22*, 5**10*, 32**25*, 28**15*, 30**10*, 15**Bob: A
Frank: EFrank: DFrank: CFrank: BFrank: A
10*, 4**15*, 16**10*, 14**10*, 15**12*, 30**Bob: B

16. 22*, 5**10*, 32**25*, 28**15*, 30**10*, 15**Bob: A
Frank: EFrank: DFrank: CFrank: BFrank: A
* Payoff To Bob; **Payoff to Frank
Bob
A
B
Mary
Mary
D
E
F
G
H
I
Bob: $20; Mary $10
Bob: $30; Mary $-9
Bob: $40; Mary $12
Bob: $90; Mary $15
Bob: $70; Mary $-8
Bob: $50; Mary $-7