Problem 06-15
The Wall Street Journal reported that Juniper Networks, Incorporated—a maker
of company network equipment—recently saw its stock price drop 90 percent,
leaving many employees’ stock options worthless. Juniper’s CEO is
considering compensation changes that will help reduce turnover and
generate incentives for employees to work harder.
Which of the following might accomplish both of those goals?
multiple choice
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Offering employees a high fixed wage
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Repricing employees' stock options Correct
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Increasing monitoring of employees at work
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Ch 6 Problem Assignment
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Problem 06-27 (algo)
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Recently, the owner of a Trader Joe’s franchise decided to change how
she compensated her top manager. Last year, she paid him a fixed
salary of $65,000 and her store made $120,000 in profits (not counting
payment to her top manager). She suspected the store could do much
better and feared the fixed salary was causing her top manager to shirk
on the job. Therefore, this year she decided to offer him a fixed salary of
$30,000 plus 15% of the store’s profits. Since the change, the store is
performing much better, and she forecasts profits this year to be
$280,000 (again, not counting the payment to her top manager).
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Assuming the change in compensation is the reason for the increased
profits, and that the forecast is accurate, how much more money will the
owner make (net of payment to her top manager) because of this
change?
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$ 153,000 Numeric ResponseEdit Unavailable. 153,000 correct.
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Does the manager make more money under the new payment scheme?
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Yes Correct
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Problem 06-17
EFI—a material handling company—pays each of its salespersons a base salary plus a
percentage of revenues generated. To reduce overhead, EFI has switched from giving each
salesperson a company car to reimbursing them $0.35 for each business-related mile driven.
Accounting records show that, on average, each salesperson drives 100 business-related miles
per day, 240 days per year.
Which of the following options for restructuring the compensation of EFI’s sales force would
most likely enhance profits?
multiple choice

Pay a salesperson a base salary plus a percentage of the profits. Correct

Increase the reimbursement for each business-related mile driven.
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Decrease the reimbursement for each business-related mile driven.
Pay a salesperson a base salary only.
Problem 06-13
The manager of your company’s pension fund is compensated based entirely
on fund performance; he earned over $1.2 million last year. As a result, the
fund is contemplating a proposal to cap the compensation of fund managers
at $100,000.
Which of the following is a likely consequence of this proposed change in
compensation?
multiple choice
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The manager will put forth a similar amount of effort,
since effort level depends entirely on how costly effort is.
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The fund manager will have lower incentives to
maximize the value of the fund, resulting in a lower return
for the participants. Correct
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The fund manager will put forth greater effort since he
or she has a guaranteed salary, and is insulated from
market fluctuations.
Problem 06-10 (algo)
Suppose the marginal cost of writing a contract of length L is MC(L) = 10 + 2L. Find the optimal
contract length when the marginal benefit of writing a contract is:
Instruction: Enter your responses rounded to two decimal places.
a. MB(L) = 100.
45 Numeric Response 1.Edit Unavailable. 45 correct.
b. MB(L) = 150.
70 Numeric Response 2.Edit Unavailable. 70 correct.
c. What happens to the optimal contract length when the marginal benefit of writing a contract
increases?
multiple choice
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It stays the same.
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It increases. Correct
It decreases.
Problem 06-09 (algo)
Suppose the marginal benefit of writing a contract is $70, independent of its
length. Find the optimal contract length when the marginal cost of writing a
contract of length L is:
Instruction: Enter your responses rounded to two decimal places.
a. MC(L) = 50 + 2L.
10 Numeric Response 1.Edit Unavailable. 10 correct.
b. MC(L) = 40 + 2L.
15 Numeric Response 2.Edit Unavailable. 15 correct.
c. What happens to the optimal contract length when the marginal cost of
writing a contract declines?
It increases. Correct
Problem 06-05
Identify the type of specialized investment that each of the following situations requires.
a. You hire an employee to operate a machine that only your company uses.
multiple choice 1
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Site specificity
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Human capital Correct
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Physical-asset specificity
b. An aerosol canning company designs a filling line that can be used only for a particular firm’s
product.
multiple choice 2
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Physical-asset specificity Correct
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Site specificity
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Human capital
c. A company builds a manufacturing facility across the street from its primary buyer.
multiple choice 3
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Site specificity Correct
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Physical-asset specificity
Human capital
Problem 06-04
Which of the following would explain why automobile manufacturers produce
their own engines but purchase mirrors from independent suppliers.
multiple choice
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Mirrors have a complex contracting environment, while
engines have little potential for opportunism.
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Mirrors manufacturing involves specific investments,
while engines are relatively uniform products.
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Engine manufacturing involves specific investments,
while mirrors are relatively uniform products. Correct
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Engines are expensive, while mirrors are relatively
inexpensive.