Unit 4

Question 1

firm

Answer 1

the entity/business org that makes the good and consists of employer and employee

Question 2

firm functions

Answer 2

employs ppl
purchases inputs to prod g&s
generally sets prices higher than cost of prod to generate prod

Question 3

the two ways division of lab is coordinated

Answer 3

markets and firms

Question 4

coordination within firms

Answer 4

the concentration of economic power is in the hands of own/man and allows them to issue commands to workers

Question 5

coordination within markets

Answer 5

power is decentralized – decisions autonomous and voluntary. order is not command, but rather a request for purchase

Question 6

three tiers of authority

Answer 6

workers (b)
managers
owners (BoD) (t)

Question 7

owners vs managers

Answer 7

owner decides on long term strategy and managers carry out these decisions by organising workers to complete necessary tasks

Question 8

asymmetric info

Answer 8

when one person involved in the exchange knows more than the other

Question 9

contract

Answer 9

a legal document or understanding that specifies a set of actions that parties to the contract must undertake

Question 10

contracts in markets

Answer 10

g&s sold in markets permanently transfer ownership from seller to buyer

Question 11

contracts in firms

Answer 11

temporarily transfer the authority of a person’s activities from employee to owner/manager

Question 12

common goal in firms

Answer 12

to keep it open, o,m,w all united in this goal

Question 13

profit

Answer 13

the residual after salaries and overheads have been paid. gen claimed by the owner and we gen assume firms aim to maximize their profit

Question 14

the principal-agent problem

Answer 14

where the principal (owner) is the person who hires an agent (manager) to act on their behalf, although the agent’s interests are not necessarily in line with those of the principal. it can be described as a strategic int between people

Question 15

incomplete contract

Answer 15

the fact that you cannot capture every aspect of every part of the job in the contract

Question 16

what makes contracts incomplete

Answer 16

info being verifiable
time and uncertainty
measurement
absence of a judiciary
preferences

Question 17

aligning the interests of employer and employee (owner/manager)

Answer 17

• having a BoD monitor the manager’s performance

- link the manager’s salary to company performance

Question 18

piece-rate work

Answer 18

where the employee is paid a fixed amount for each unit of the product made / according to their productivity

Question 19

reservation option

Answer 19

when the employee is paid the lowest wage they would accept

Question 20

issues with reservation option

Answer 20

• no incentive to work hard

- would not fear losing their job because they do not value it

Question 21

employment rent

Answer 21

the dif between the value of the job and the next best alternative. measures the cost of job loss.

Question 22

employment rent includes

Answer 22

• lost inc
• costs req to start new job
• loss of non-wage benefits
• social costs

Question 23

disutility

Answer 23

something decreases your utility / negative utility

Question 24

when employment rent is large

Answer 24

employees value their jobs more and will work harder to avoid losing their jobs

Question 25

labour-discipline model

Answer 25

models the firm interaction betw employer and employee (seq move game) where the employer chooses wage and employee chooses effort level

Question 26

efficiency wages

Answer 26

the payment an employer makes which is higher than an employee's reservation wage, so as to motivate them to provide effort on the job