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.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

During the 1980’s Xerox diversified into financial services. The
company had gained experience in finance through the leasing of
its copy machines, and management believed that by acquiring
firms in the financial sector, it could leverage this experience. In
late 1982, Xerox purchased a property/casualty insurance
company, Crum and Foster, for $1.6 billion. This acquisition was
followed by other acquisitions in life insurance, real estate, and
investment banking.”*

When two firms merge, sometimes the stock value of the merged
company is larger than the separate stock values of the original
companies added up. According to economists, when is this likely
to happen? Evaluate the merger described above using the
economists approach. Is it likely that Xerox shares after the
acquisition were more valuable than the sum of the shares of all
the component companies prior to the merger.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Bob and Carol are playing a non-cooperative, simultaneous choice,
game that is described in the table below. Bob picks the columns,
and Carol picks the rows. What outcome is predicted by the
material discussed in class?
Bob’s Strategy
A
B
C
D
3*, 8**
7*, 12**
15*, 15**
E
15*, 9**
6*, 16**
10*, 7**
Carol’s
strategy
* Payoff to Carol; **Payoff to Bob,
a.
b.
c.
d.
e.
Carol
Carol
Carol
Carol
Carol
picks
picks
picks
picks
picks
D and Bob picks B.
D and Bob picks C.
E and Bob picks A.
E and Bob picks B.
E and Bob picks C.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Which of the following is not a reason for some employers to pay
with fringe benefits rather than money according to the
models discussed in class?
a. Employers can sometimes obtain the fringe benefits at a lower
cost than the employees can.
b. Fringe benefits are sometimes have un taxed by the government.
c. Fringe benefit packages can make your firm more attractive to
particular types of employees.
d. All of the above are reasons for compensating employees rather
than fringe benefits in some circumstances.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Statement 1: “Firms with internal labor markets have no incentive
to keep older employees since their marginal revenue product of
labor is greater than the wage paid late in their careers.”
Statement 2: “Workers in firms with internal labor markets often
spend a lot of time lobbying for promotions.”
a.
b.
c.
d.
Statement 1 is true, but 2 is false.
Statement 2 is true, but 1 is false.
Both statements are true.
Both statements are false.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Statement 1: “Investment in human capital refers to the sum total of
all of a person’s learning activities to date.”
Statement 2: “Firms often find it easier to pay for firm specific
human capital investment than for general human capital
investment.”
a.
b.
c.
d.
Statement 1 is true, but 2 is not.
Statement 2 is true, but 1 is not.
Both statements are false.
Both statements are true.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Statement 1: “In the basic competitive labor market model, the last
employee hired is paid their marginal revenue product of labor.”
Statement 2: “The marginal revenue product of labor is the amount
of extra product produced when labor is increased a small
amount.”
a.
b.
c.
d.
Statement 1 is correct, but 2 is not.
Statement 2 is correct, but 1 is not.
Both statements are correct.
Neither statement is correct.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Which of the following is not an advantage of incentive pay
based on team production?
a. Frequently the output of a team is easier to measure than the
output of an individual.
b. Team incentive pay encourages cooperation and teamwork.
c. Team incentive pay encourages employees to monitor one
another.
d. Team incentive pay encourages everyone to work harder.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Statement 1: “The most profitable level of effort to get from an
employee is typically not the highest level of effort. Instead,
profitable effort levels are the result of a tradeoff between the
contribution of effort to the firm’s revenue and the size of the
compensating differential that must be paid to the employee to
keep them working at our firm.”
Statement 2: “Negative compensating differentials are often a reality
in jobs that have very pleasant non-monetary aspects.”
a.
b.
c.
d.
Both statements are correct.
Both statements are false.
Statement 1 is correct, but 2 is false.
Statement 2 is correct, but 1 is false.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Jane and Randy are playing a sequential game. Jane moves first
(picking either strategy A or B) and Randy moves second
(choosing among D, E, and F if Jane picked A and G, H and I if
Jane picked B. According to the material discussed in class, what
is the likely outcome for this game?
D
Randy
E
F
A
10*, 15**
12*, 2**
5*, 25**
Jane
B
Randy
G
10*, 6**
H
9*, 95**
I
8*, 100**
* Payoff for Jane; ** Payoff for Randy
a.
b.
c.
d.
e.
Jane will pick B and Randy will pick I
Jane will pick B and Randy will pick G
Jane will pick A and Randy will pick F
Jane will pick A and Randy will pick E
The outcome of the game is not listed in the choices above.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Bob’s Choices
Edna’s
Choices
A
B
C
D
42* / 29**
31* / 40**
45* / 50**
E
31* / 16**
42* / 51**
55* / 28**
F
32* / 28**
19* / 38**
42* / 48**
*Money received by Edna; ** Money received by Bob
Which of the following statements best describe the situation in the
simultaneous choice game depicted above?
a. Strategy F is a dominated strategy for Edna, while strategy A is a
dominated strategy for Bob.
b. Strategy E is a dominated strategy for Edna, while strategy A is
dominated strategy for Bob.
c. There are no dominated strategies in this game.
d. Strategy F is a dominated strategy for Edna, while strategy c is a
dominated strategy for Bob.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Statement 1: “A person applying the Economist’s view of behavior as
discussed in chapter 2 of our textbook always expects a person
receiving more money to work harder.”
Statement 2: “A person using the good citizen model generally
believes that workplace problems derive from problems workers
experienced when growing up.”
a.
b.
c.
d.
Statement 1 is true, but 2 is false.
Statement 2 is true, but 1 is false.
Both statements are true.
Both statements are false.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Ed and Bob are playing an un-repeated, simultaneous-move game with payoffs described
in the table below.
Ed’s Strategy
A
B
C
D
E
3*,4**
7*,8**
15*,14**
6*,7**
F
9*,10**
8*,8**
10*,9**
8*,8**
Bob’s
Strategy
* Bob’s Payoff; ** Ed’s Payoff
Which of the following answers best describes the likely outcome, based on the material
in the text by Dixit and Nalebuff?
a. Bob will pick “E” and Ed will pick “A”
b. Bob will pick “F” and Ed will pick “A”
c. Bob will pick “E” and Ed will pick “C”
d. Bob will pick “F” and Ed will pick “C”
e. There are two equally likely outcomes. Either Bob picks “F” and Ed “A” or Bob
picks “E” and Ed “C”
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Statement 1: “Employees are most productive when they receive pay
based on statistical measures of their performance. For this
reason, pay based on statistical performance is sometimes
referred to as paying ‘efficiency wages’.”
Statement 2: “Firms with internal labor markets often face problems
with older employees wanting to stay in their jobs much longer
than in other firms.”
a.
b.
c.
d.
Both statements are true
Both statements are false
Statement 1 is true, but 2 is false
Statement 2 it true, but 1 is false
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Statement 1: “People prefer to get paid money, rather than fringe
benefits, since they can choose how they spend it. As a general
rule, if the firm can’t get a better price for the benefit than the
employees can, a profit-maximizing firm will pay employees
money rather than benefits.”
Statement 2: “Since employees have different tastes in fringe
benefits, it is generally profitable to give employees lots of choice
among different benefits packages.”
a.
b.
c.
d.
Both statements are true
Both statements are false
Statement 1 is true, but 2 is false
Statement 2 is true, but 1 is false
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Statement 1: “As a general rule, economic analysis supports the
notion that a profit-maximizing manager wants his employees to
work as hard as they can during their time at work.”
Statement 2: “Since incentive pay can create better employee
motivation, economic theory suggests that it should always be
used. As a general rule, greater emphasis on incentive pay will
make the firm more profitable.”
a.
b.
c.
d.
Both statements are true
Both statements are false
Statement 1 is true, but 2 is false
Statement 2 is true, but 1 is false
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Statement 1: “When a firm’s workers are unproductive, most
economists suggest that eliminating sources of worker
unhappiness is the best place to start solving these problems.”
Statement 2: “Suppose that the average cost of flying an airplane
from Los Angeles to New York is $45,000, while the marginal cost
of tonight’s trip is $20,000. If tonight’s plane has sold tickets that
generated only $22,000 then profits will typically be higher if the
flight is cancelled.”
a.
b.
c.
d.
Both statements are true
Both statements are false
Statement 1 is true, but 2 is false
Statement 2 is true, but 1 is false
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.