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Which of the following is not likely to help a firm motivate its workers to put forth more effort?


A) Providing a free or subsidized company gym and/or cafeteria.
B) Installing monitoring equipment.
C) Providing competitive year-end bonuses.
D) Implementing a profit-sharing scheme.
E) All of these are likely to motivate workers to put forth more effort.

F) A) and B)
G) B) and E)

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A piece rate compensation system


A) underemphasizes the quantity of output produced.
B) attracts and benefits the most able workers.
C) inherently hurts minorities.
D) decreases a firm's productivity.
E) has no disadvantages.

F) A) and E)
G) A) and D)

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Which is not true regarding a delayed-compensation contract?


A) A delayed-compensation contract discourages workers from shirking.
B) A delayed-compensation contract decreases employee turnover within the firm.
C) An effective delayed-compensation contract requires a mandatory retirement age.
D) A delayed-compensation contract necessarily costs more in labor costs than a time-rate system.
E) A delayed-compensation contract is associated with an upward-sloping age-earnings profile.

F) B) and D)
G) B) and C)

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A firm owner wants a manager to make difficult personnel decisions when necessary (which requires firing a worker every now and then) in order to maximize the firm's profits. The manager, however, prefers to not fire anyone. The worker also prefers not to be fired. In this example, who is the principal and who is the agent?


A) The firm owner is the principal. The manager is the agent.
B) The firm owner is the principal. The should-be-fired worker is the agent.
C) The manager is the principal. The firm owner is the agent.
D) The should-be-fired worker is the principal. The manager is the agent.
E) The should-not-be-fired worker is the principal. The firm owner is the agent.

F) B) and E)
G) B) and C)

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If designed correctly, tournaments


A) discourage competition.
B) reward players according to their ranked productivity.
C) elicit equal effort from all workers.
D) always reward a single winner.
E) reduce the applicant pool to just those workers with the best degrees.

F) A) and D)
G) A) and C)

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B

Suppose a firm overpays its workers at the start of the job, and then the firm slowly lowers wages over time until eventually the firm pays the workers considerably less than the worker's marginal product of labor. What prevents this "reverse of a delayed-compensation scheme" from being implemented?


A) Workers prefer wages to increase over time.
B) The firm would fire the worker as soon as the worker's value of marginal product exceeded the worker's wage.
C) Workers would leave the job as soon as the firm tries to pay the worker less than his or her value of marginal product.
D) The firm would need to enforce a mandatory retirement age which is illegal in the United States.
E) The workers would never have an incentive to invest in general training.

F) D) and E)
G) B) and D)

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C

Empirically, the relationship between CEO performance (measured in terms of share price) and CEO compensation is


A) large and positive.
B) small and positive.
C) nonexistent.
D) small and negative.
E) large and negative.

F) C) and D)
G) A) and B)

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One piece of evidence in favor of the efficiency wage model is that some sectors of the economy pay relatively high wages, whereas other sectors pay lower wages. This supports the efficiency wage model as it seems to provide evidence of what?


A) The existence of dual labor markets.
B) There are compensating differentials being paid depending on the type of work being done.
C) Unemployment is constant across sectors.
D) High-wage firms take advantage of delayed-compensation contracts.
E) Workers voluntarily provide bonds in case they are caught shirking.

F) A) and E)
G) A) and C)

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Which one of the following statements about piece rate compensation schemes is false?


A) Piece rate systems attract more able workers.
B) Piece rate systems elicit high levels of effort.
C) Piece rate systems are preferred by discriminatory firms.
D) Piece rate systems discourage nepotism.
E) Piece rate systems tie pay to performance.

F) A) and C)
G) A) and E)

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A firm that finds it extremely expensive to monitor the output of each worker will likely pay its workers


A) with piece rates.
B) with time rates.
C) with incentive pay.
D) according to how much each worker produces.
E) on commission.

F) B) and D)
G) A) and E)

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Which of the following statements is false?


A) Profit sharing redistributes profits back to the workers.
B) Bonuses are frequently linked to performance.
C) Bonuses are paid in addition to base salary.
D) Free-riding can result from a compensation scheme that gives competitive individual bonuses.
E) Free-riding can result from profit sharing.

F) A) and B)
G) A) and C)

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The idea of linking public school teacher salaries to student outcomes is basically an attempt to impose a ____________ compensation scheme on teachers.


A) time-rate
B) piece-rate
C) tournament
D) profit-sharing
E) work-for-pay

F) A) and B)
G) C) and D)

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B

One argument against using a profit-sharing scheme is the potential for free-riding. In this situation, free-riding refers to


A) one firm using the same contract specifications as another firm.
B) a worker not providing effort because his contribution to profit is very small.
C) a worker not providing effort because he doesn't want his co-workers' wages to increase.
D) the firm not honestly reporting its profits.
E) profits being insensitive to worker effort because all increases in profit are returned to the workers due to the profit-sharing scheme.

F) C) and E)
G) B) and C)

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To pay piece rates in order to elicit effort, it must be the case that


A) the firm can monitor individual worker output.
B) workers refuse to accept a time rate.
C) firms cannot monitor individual worker effort.
D) the production process relies on group work.
E) the firm does not want to maximize profits.

F) A) and E)
G) B) and D)

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Piece rates typically


A) encourage greater effort from workers.
B) are more common than time rates.
C) are associated with the worker incurring less risk concerning one's income.
D) are more common among higher paying jobs.
E) do not reward skill.

F) C) and D)
G) B) and E)

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A standard efficiency wage model pays workers higher wages in order to increase worker efficiency. As a result, firm profits increase and there is a pool of involuntarily unemployed workers. In this model, if the firm's cost of monitoring effort falls,


A) the efficiency wage will fall.
B) the number of shirking workers will fall.
C) firm profits will fall.
D) the firm will increase its number of factory managers.
E) the pool of involuntarily unemployed workers will increase.

F) A) and B)
G) B) and D)

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An efficiency wage is defined as


A) a wage above the competitive wage that elicits greater effort on the part of the workers.
B) a wage below the competitive wage that elicits greater effort on the part of the workers.
C) any wage scheme that is accepted by the union.
D) any wage scheme that pays different workers different wages.
E) any wage scheme that pays all workers the same wage.

F) B) and C)
G) A) and B)

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What happens to the piece rate if there is a ratchet effect?


A) The piece rate decreases over time.
B) The piece rate increases over time.
C) The piece rate is replaced with a time rate.
D) The piece rate is replaced with a salary contract.
E) The piece rate is only paid to the least productive workers.

F) C) and E)
G) A) and B)

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Principal-agent problems arise when


A) the principal negotiates contracts on behalf of the agent.
B) the agent negotiates contracts on behalf of the principal.
C) the agent's objectives are different from the principal's objectives.
D) firm owners (the principals) pay employee wages (the agents) based on race.
E) workers (the principals) work harder when the firm owners (the agents) increase wages.

F) C) and D)
G) All of the above

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The optimal efficiency wage requires


A) firms to pay the competitive wage.
B) firms to pay any wage above the competitive wage.
C) firms to pay the unique wage above the competitive wage such that the elasticity of output with respect to wages equals one.
D) firms to pay fringe benefits.
E) the total product curve to be downward sloping.

F) C) and E)
G) C) and D)

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