THE FIRM: OWNERS, MANAGERS, AND EMPLOYEES (unit 6)

Question 1

division of labour

Answer 1

The specialization of producers to carry out different tasks in the production process

Question 2

separation of ownership and control

Answer 2

The attribute of some firms by which managers are a separate group from the owners.

Question 3

Firm-specific asset

Answer 3

Something that a person owns or can do that has more value in the individual’s current firm than in their next best alternative

Question 4

employment rent

Answer 4

The economic rent a worker receives when the net value of her job exceeds the net value of her next best alternative (that is, being unemployed)

Question 5

Labour discipline model

Answer 5

A model that explains how employers set wages so that employees receive an economic rent (called employment rent), which provides workers an incentive to work hard in order to avoid job termination

Question 6

involuntary unemployment

Answer 6

The state of being out of work, but pre­ferring to have a job at the wages and working conditions that other­wise identical employed workers have

Question 7

why are labour contracts generally incomplete?

Answer 7

Firms do not know exactly what they will need a worker to do in the
future.

It is too costly for firms to observe exactly how well each employee does their job

Question 8

what are the characteristics of a piece rate contract?

Answer 8

Payment is per unit of output (e.g., per item made, per task completed).

Encourages higher productivity, since earnings are directly tied to output.

Common in manufacturing, agriculture, and freelance work.

Question 9

w=wages
e=effort

e/w equals the slope of the isocost of effort line and effort per wage (efficiency units)

Answer 9

e/w =MRS
How much effort is the
employer willing to trade off when
reducing the wage

Question 10

the steepest isocost line for effort exists at the equilibrium point where MRT=MRS on the worker’s best response curve. (All lines start at the origin) The employer can get the best effort to wage ratio at this point and thus, profits are maximised here.

Question 11

incomplete contract

Answer 11

An incomplete contract is a contract that does not specify every possible detail or outcome of an agreement, especially under uncertain or changing conditions