Question 5 The bonus of a plant manager in a vertically integrated firm is based
ID: 1194241 • Letter: Q
Question
Question 5
The bonus of a plant manager in a vertically integrated firm is based on the following formula:
Bonus = 10,000 - 0.5(Qf - Q)
where Qf is feasible production and Q is actual production. The value for Qf is provided by the plant manager at the beginning of the year. With this scheme, the plant manager has an incentive:
A) to underestimate Qf.
B) to overestimate Qf.
C) to reveal the true Qf and make Q as small as possible.
D) to reveal the true Qf and make Q as large as possible.
Which incentive scheme would simultaneously elicit accurate information about feasible plant production levels and motivate managers to perform up to potential (in the following schemes, B is the bonus payment, Q is actual plant output, and Qf is the manager's estimate of feasible output)?
A) B = 0.4Q
B) B = 0.4(Q - Qf)
C) B = 0.4Qf + 0.3(Q - Qf) if Q > Qf
D) B = 0.4Qf - 0.6(Q - Qf) if Q < Qf
E) B = 0.4Qf - 0.6(Q - Qf) if Q > Qf
Firms that have several plants that produce the same or related products are said to be:
A) horizontally integrated.
B) vertically integrated.
C) conglomerates.
D) cooperatives.
If all of the divisions in a vertically integrated firm are owned by the same company, why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms?
A) Divisions that produce parts for other divisions have effective monopoly power, so the outcome for these division must be inefficient.
B) This outcome is no longer possible in the U.S. after passage of the Sarbanes-Oxley law.
C) Vertically integrated firms are often subject to antitrust investigations, so managers routinely limit the amount of information that flows between divisions.
D) Managers in some divisions may not have information about production capacities or costs in related divisions.
Firms that contain some divisions that produce parts and components to be used by other divisions in order to generate finished goods are said to be:
A) horizontally integrated.
B) vertically integrated.
C) multinationals.
D) corporations.
Explanation / Answer
1: The plant manager has an incentive to reveal the true Qf and make Q as large as possible.
2 B= 0.4(Q-Qf)
3 Conglomerates
4 Division that produces parts for other divisions have effective monopoly power so the outcome for these division must be efficient
5 Horizontally integrated
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