Econ 308
Summer 2014
Professor Chapman
Office: BB 4234
Examination
Directions: Answer all questions. All students are required to sign the Academic Honesty Notice given
below.
Academic Honesty Notice
The following notice is provided to you for legal reasons.
Cheating is defined as any action which is an attempt to gain information or provide information to others
during an examination. It includes: looking at someone’s exam or scantron; providing access to an exam or
scantron; or using any source of information other than one’s own memory. The instructor in this class will
employ various methods to document any form of cheating.
The College of Business and Economics takes any occurrence of cheating very seriously. If you cheat in this
class, you will receive an “F” in the course and be precluded from further class attendance. Further, the college
will report the full facts to the University. The University punishments for cheating include suspension for one
semester; suspension for one year; and permanent expulsion.
Please sign the form below:
I have read and understand the above Academic Honesty Notice.
Name: ______________________________________
(Print)
Signature: ___________________________________
Date: _______________________________________
Economics 308 Midterm
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
____
1. Which of the following is not a way of creating value for a firm mentioned in class and in the text?
a. Taking advantage of economies of scope.
b. Reducing consumer costs of negotiating to purchase a product.
c. Selling substitute goods at a reduced price.
d. Reducing consumer costs of searching for information about the good.
____
2. Statement 1: “To determine if a player has a dominant strategy the player needs to check to see if he/she
would make the same choice for every possible choice his/her opponent might make.”
Statement 2: “To determine if a player has a dominated strategy the player must compare two of his/her
possible choices and see if one of the strategies is better than the other for every choice his/her opponent might
make.”
____
____
a. Statement 1 is true, but 2 is false
b. Both statements are false
c. Statement 2 is true, but 1 is false
d. Both statements are correct
3. Which of the following is not true about non-cooperative Nash Equilibrium in a simultaneous player game?
a. There is always a Nash equilibrium in mixed strategies
b. There often are many Nash equilibria
c. There may be no Nash equilibrium in pure strategies.
d. All of the above choices are true statements about Nash Equilibrium
4. Statement 1: “As a general rule, economist believe that managers should try to get their employees to work
just hard enough to balance the compensating differential that must be paid to for unhappiness with extra work
and the extra revenue generated by that extra work.”
Statement 2: “If employee effort was observable to all, then economists believe a simple incentive pay
contract could induce the most profitable level of employee effort without any significant problems.”
a.
b.
c.
d.
Statement 1 is true, but 2 is false
Statement 2 is true, but 1 is false
Both statements are false
Both statements are true
____
5. Statement 1: “Firms are much more likely to pay for employee education when the skills are valuable only at
the current firm.”
Statement 2: “General human capital is typically less valuable to a firm than firm specific human capital.”
____
a. Statement 2 is true, but 1 is false
b. Statement 1 is true, but 2 is false
c. Both statements are true
d. Both statements are false
6. Statement 1: “As a general rule, economists recommend that profit maximizing firms make decisions by
making decisions based on averages. For example, if average revenue is greater than average cost, the firm is
making a profit and so that particular level of production is profitable.”
Statement 2: “Economists believe that things like tax rates determine levels of charitable giving and not a
desire to help others.”
____
a. Both statements are true
b. Statement 1 is true, but 2 is false
c. Statement 2 is true, but 1 is false
d. Both statements are false
7. Statement 1: “Franchising is a good way to correct incentives for some employees. However, it can be
expensive for the firm because it causes the Franchisee to face increased risk.”
Statement 2: “Employee ownership strategies, such as franchising, work well when the output of a group of
employees is easily measured, but the contribution of individual employees is difficult to calculate.”
____
a. Statement 1 is true, but 2 is false
b. Both statements are true
c. Both statements are false
d. Statement 2 is true, but 1 is false
8. Statement 1: “The type of fringe benefits a firm offers in its compensation plan often influence the type of
employees they end up hiring.”
Statement 2: “If a fringe benefit has no tax advantages, then economists will see no reason for an employer to
include it in a firm’s compensation plan.”
____
a. Statement 1 is true, but 2 is false
b. Both statements are false
c. Both statements are true
d. Statement 2 is true, but 1 is false
9. Statement 1: “Firms paying efficiency wages are using a form of incentive pay that explicitly rewards
employees for their productivity.”
Statement 2: “Internal labor markets are most attractive to firms in markets facing constant technical change,
so that the skills needed to do the job change rapidly over time.”
a.
b.
c.
d.
Both statements are true
Both statements are false.
Statement 2 is true, but 1 is false
Statement 1 is true, but 2 is false
____ 10. Which of the following is a prediction of the theory of efficient risk sharing when applied to the type of
compensation paid to employees?
a. Lower levels of employee should be paid on salary since it exposes them to less risk.
b. Higher levels of management, such as CEO’s (but not stock holders), should be given
significant incentive pay.
c. Lower levels of employee should be given incentive pay.
d. All of the above statements are correct predictions of the theory of efficient risk sharing.
Essay
11. Some kinds of vision care insurance offered as fringe benefits by firms in the US pay for only a once-per-year
eye exam and a very inexpensive pair of glasses if needed. Typically no other benefits are offered by these
insurance plans. Most of these insurance packages cover both the employee and their immediate family. This
sort of insurance is available to people who don’t get it from their employers at the same costs that would be
paid by employers. Despite this, very few people buy this insurance when it is not provided by an employer.
While this type of insurance is a common fringe benefit in the US, it is rare in many other countries -- even in
countries that do not provide vision services through a government program. Use concepts from class to
suggest reasons why this might be the case. Also discuss reasons why vision insurance is purchased so rarely
in the US when it is not a fringe benefit of employment. Only words written in the box below will be graded.
12. Medical doctors serving the families of military US personnel are often paid based on the number of patients
they see in a given month. Use concepts from class to discuss the desirability of this form of incentive pay using
concepts developed in class. Only words written in the box below will be graded.