Business Management Relationships Quiz Questions
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Which of the following is not a principle/agent relationship?
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Shareholders/Company CEO
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Shareholders/Company employees
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Company/Hired counsel
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Carmaker/Auto part supplier
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Shareholder/IRS auditors of a company
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Explore key concepts in agency theory with this Business Management relationships quiz. Assess your understanding of principal-agent dynamics, hidden actions and information, and solutions to coordination problems in real-world scenarios.
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- 2.
Which of the following management actions reflects agency problems due to the fact that information held by the agent is hard to observe?
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Enriching managers themselves even if shareholders do not benefit
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Avoiding risky strategic initiatives even if shareholders view them as "reasonable"
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Paying for services that seem excessive to the shareholders
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Pumping up the firm's short-run performance even if shareholders are harmed in the long-run
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Giving work a mediocre effort so managers do not have to work excessive hours
Correct Answer
A. Paying for services that seem excessive to the shareholdersExplanation
The management action of paying for services that seem excessive to the shareholders reflects agency problems due to the fact that information held by the agent is hard to observe. This is because the shareholders may not have full visibility into the value or necessity of the services being paid for, and the agent (management) may take advantage of this lack of information to benefit themselves at the expense of the shareholders.Rate this question:
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- 3.
What term describes situations in which the aspects of the agent's action are the important to the principle cannot be observed?
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Unobservable action
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Hidden action
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Convert action
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Unobservable information
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Hidden information
Correct Answer
A. Hidden actionExplanation
Hidden action refers to situations where the aspects of an agent's action that are important to the principle cannot be observed. In other words, the agent's actions are not visible or easily detectable, making it difficult for the principle to fully understand or evaluate the agent's behavior. This term is commonly used in fields such as economics and game theory to describe situations where there is a lack of transparency or information asymmetry between the agent and the principle.Rate this question:
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- 4.
What term describes situations in which aspects of the productive environment that are important to the principle cannot be observed?
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Unobservable action
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Hidden action
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Convert information
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Unobservable information
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Hidden information
Correct Answer
A. Hidden informationExplanation
Hidden information refers to situations in which aspects of the productive environment that are important to the principle cannot be observed. This means that there are certain pieces of information that are not visible or accessible to the observer, making it difficult to fully understand or analyze the situation. Hidden information can have significant implications in decision-making and can affect the outcomes of various processes or systems.Rate this question:
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- 5.
Which of the following solutions has addressed coordination problems in the tin market?
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Pricing
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Contractor
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Monitoring
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Scheduling
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Software
Correct Answer
A. PricingExplanation
Pricing is the correct answer because it can effectively address coordination problems in the tin market. By setting the right prices, it encourages coordination among market participants and helps to balance supply and demand. Proper pricing strategies can incentivize producers to increase or decrease production based on market conditions, leading to better coordination and stability in the tin market.Rate this question:
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- 6.
How are the coordination problems that exist around the construction of a new home generally solved?
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Pricing
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Software
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Bureaucracy
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Contractor
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Markets
Correct Answer
A. ContractorExplanation
When it comes to the coordination problems that arise during the construction of a new home, hiring a contractor is generally the solution. A contractor is responsible for overseeing the entire construction process, including managing subcontractors, scheduling work, and ensuring that everything is done according to the plans and specifications. They act as a central point of contact between the homeowner, architects, engineers, and other parties involved in the project. By hiring a contractor, homeowners can rely on their expertise and experience to navigate the complexities of construction and ensure that the project is completed successfully.Rate this question:
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- 7.
Which of the following is not a reason Yahoo! CEO Jerry Yang as an agent would turn down Microsoft's takeover offer?
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Yang believed the firm is worth greater than the offer
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Yang believed that the combined firm would create value for shareholders
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Yang was working on behalf of shareholders to maximize the purchase price
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Yang had different preferences than shareholders regarding the firm's independence
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Yang had hidden information about future project for yahoo!
Correct Answer
A. Yang believed that the combined firm would create value for shareholdersExplanation
Yang believed that the combined firm would create value for shareholders. This suggests that he saw potential benefits and synergies in a merger with Microsoft, indicating that he would not turn down the takeover offer for this reason.Rate this question:
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- 8.
What is one way insurers address moral hazard (hidden action) problems to align the interest of the insured with the insurer?
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Underwriting all applicants for insurance
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Charging lower premiums for riskier ventures
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Performance based incentives (i.e. linking premiums to presence of fire detectors)
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Insuring different parties from the same industry
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Require full disclosure of all information (i.e. health status prior to issuing an income annuity)
Correct Answer
A. Performance based incentives (i.e. linking premiums to presence of fire detectors)Explanation
Insurers address moral hazard problems by implementing performance-based incentives such as linking premiums to the presence of fire detectors. This means that policyholders who take proactive measures to mitigate risks, such as installing fire detectors, are rewarded with lower premiums. By doing so, insurers align the interests of the insured with their own, as policyholders are incentivized to take actions that reduce the likelihood of filing a claim. This helps to mitigate moral hazard by encouraging responsible behavior and reducing the potential for hidden actions that could result in increased risks for the insurer.Rate this question:
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- 9.
What factors has prevented managers from offshoring more complex IT functions for U.S. companies?
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Hidden information
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Agent issues
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Principle issues
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Coordination
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Objective issues
Correct Answer
A. CoordinationExplanation
The factor that has prevented managers from offshoring more complex IT functions for U.S. companies is coordination. This means that the challenge of effectively managing and coordinating complex IT functions across different locations and time zones has been a deterrent for offshoring. It is difficult to ensure seamless communication, collaboration, and coordination between teams located in different parts of the world, which can lead to delays, miscommunication, and inefficiencies. Therefore, coordination issues have hindered the offshoring of more complex IT functions.Rate this question:
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- 10.
Which of the following is a tool a firm can use to combat agency problems?
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Monitoring
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Performance-Based-Incentives
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Bureaucracy
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A, b & c
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None of the above
Correct Answer
A. A, b & cExplanation
The firm can use monitoring, performance-based incentives, and bureaucracy as tools to combat agency problems. Monitoring involves keeping a close eye on the actions and behaviors of employees to ensure they are acting in the best interest of the firm. Performance-based incentives provide motivation for employees to perform well and align their interests with the firm's goals. Bureaucracy refers to the establishment of rules and procedures to ensure accountability and minimize opportunistic behavior. Using a combination of these tools can help mitigate agency problems within the firm.Rate this question:
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- 11.
Which of the following factors is an effectine tool for companies to use to migrate hidden action and hidden information problems in agency relationships?
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Monitoring
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Offshoring
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Coordination
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Objectives
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Confrontation
Correct Answer
A. MonitoringExplanation
Monitoring is an effective tool for companies to use to migrate hidden action and hidden information problems in agency relationships. By closely observing and evaluating the actions and behaviors of agents, companies can ensure that their interests are being protected and that agents are acting in accordance with their objectives. Monitoring allows companies to detect and address any potential issues or conflicts that may arise, promoting transparency and accountability in the agency relationship. This helps to reduce information asymmetry and mitigate the risks associated with hidden actions and hidden information.Rate this question:
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- 12.
Which of the following is not a performance based incentive?
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A Nordstrom salesperson being paid a commission
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A Kraft brand manager receiving an end of year bonus
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A CEO receiving a stock option
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A recurring standard percentage end of year pay raise
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A employee receiving a special parking privilege award for the month
Correct Answer
A. A recurring standard percentage end of year pay raiseExplanation
A recurring standard percentage end of year pay raise is not a performance based incentive because it is not directly tied to an individual's performance or achievements. It is a predetermined increase in salary that is given to all employees at the end of the year, regardless of their performance. In contrast, the other options mentioned (commission, bonus, stock option, special award) are all directly linked to an individual's performance and serve as incentives to motivate and reward high performance.Rate this question:
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- 13.
Which of the following factors is a way that companies can combat agency problems around commission based incentives?
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Coordination
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Monitoring
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Bureaucracy
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Offshoring
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Better base pay
Correct Answer
A. BureaucracyExplanation
Bureaucracy can be a way for companies to combat agency problems around commission-based incentives by implementing strict rules and procedures. By having a bureaucratic structure, companies can ensure that employees follow a set of guidelines and protocols, reducing the likelihood of unethical behavior or self-interest. Bureaucracy can also provide a system of checks and balances, allowing for increased monitoring and oversight of employees' actions. This can help prevent conflicts of interest and ensure that employees are acting in the best interest of the company and its stakeholders.Rate this question:
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Current Version
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Aug 24, 2023Quiz Edited by
ProProfs Editorial Team -
Jun 16, 2012Quiz Created by
Orsay
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