Thursday, December 5, 2013

Candidate Questions for the Final

I have decided NOT to distribute last year's exam.  When I did that for the midterms, it produced what I perceived to be memorization of the solution I offered up.  I'd much prefer you to generate your own solution and give it in your own words.  So I'm trying a different approach in an attempt to deter some of the memorization.

Of course, you can post questions (as comments to this post) and I will respond to them.  But I will do so without providing a full answer to the question that you can memorize in toto.

Also, you can schedule a meeting with me if you'd like.  I'm happy to discuss this or any other course issue with you.

There are six candidate questions below and three will be chosen from the six.  Two are new to you.
You haven't seen them before and are on the last portion of the course.  The other four you have seen either the question as posed or something similar.  These are questions on the content of Midterm 1 and Midterm 2 that didn't appear on those exams.


The New Questions:

A.  This question concerns shirking and explicit incentives to prevent it, as well as the consequences on market equilibrium.  Compare and contrast the static principal-agent model with random output to the Shapiro-Stiglitz model.  Discuss the underlying assumptions, how incentives for putting forth effort are provided, and the consequence on equilibrium, from both the contractual perspective and the market perspective.  Also discuss for each model whether or not there is a role for government to play to improve market performance.

B.  This question concerns innovative practice in the the setting of the repeated Prisoner's Dilemma.  Employees with some responsibility allocated to them may be quite diligent in doing their established work, so shirking per se is not an issue at all, but they may be very reluctant to try out new approaches for fear of being blamed when an experiment along those lines blows up in their faces.  There are various possible solutions to this issue:
     (i) provide large rewards for experiments that succeed,
     (ii) pool experiments across several employees each with some responsibility so responsibility is shared,
    (iii) punish work groups if they don't show innovation over time.
     (iv) possibly other mechanisms that might occur to you.

Discuss the pros and cons of each of these and discuss how the organization might come to a particular approach in trying to encourage organization members to be innovative.

Candidate Questions from Midterm 1

C.  This question concerns transfer prices.  Provide a working definition for what a transfer price is.  In a for-profit organization how should ownership (shareholders) want the transfer price to be set?  Explain why others in the organization might want the transfer price to be set differently.  What transfer price would these others like to see?  When service quality is jointly set with the transfer price, what service quality would ownership like to see?  Explain why this is the case.  Others may want a different service quality level.  Explain how their preferred service quality level differs from what ownership wants.

D.  This question concerns economic efficiency concepts.  There is a partial equilibrium concept and a general equilibrium concept.  Describe each of these.  Do the two concepts always coincide?  If not, under what additional assumptions do they coincide.  Provide an argument for why we should expect efficient outcomes.  Economic efficiency has been critiqued on several grounds. Explain some of these criticisms and provide settings where the particular critique appears valid.


Candidate Questions from Midterm 2

E. This question concerns procurement. Discus why in government agencies procurement is subject to  regulation. What is the regulation aimed at preventing? What does it try to accomplish? Explain why during the bidding process the lowest price bidder may not be selected, although the process is competitive. Discuss the various goals the agency conducting the procurement may have going into the process.

F. This question concerns conflict in organizations and, in particular, Model 1 and Model 2 of Schon and Argyris. Explain how a manager can without intending to do so cause the staff under him to be angry with his management approach. What is it that causes their anger? What are the consequences for the unit when the manager behaves this way? Explain the Schon and Argyris recommendation about how the manager might diffuse the tension. Why does their recommendation have a chance to be effective?


  1. For Part D, which models would fit under partial equilibrium and which would be under general equilibrium. In other words, what is the difference between them?

    1. For general equilibrium, think of the Edgeworth Box and Pareto Optimality. For partial equilibrium think of supply and demand, consumer and producer surplus, and deadweight loss.

  2. For part A, is there a certain section in either textbook where we can find more information on the principal agent model with random output?

  3. Chapter 6 and 7 of M&R that deal with moral hazard are about this model - directly or indirectly.

  4. For transfer price, I am a little confused about its relationship with quality, especially for owners and others. Thank you.

    1. I wrote up some notes of this as we covered it in class. See if they help.

    2. Going off of this, for the downstream division, the notes say that their division's marginal benefit increases with increasing service quality, however,wouldn't the downstream division prefer a lower service quality then optimal? Can you please explain this?

    3. The change in the Marginal Benefit with respect to service quality is - B'(s)Q. Since B'(s) < 0, the overall expression is positive. So the downstream division would clearly prefer increased service quality if the transfer price remain unchanged. But the transfer price will rise more than offsetting that gain at fixed price.

  5. For Part A, may I have more information or tips on the government part? I am not sure about the relationship between these two models and the government.

    1. The issue is whether there are externalities in the market equilibrium or not. When there are no externalities, a competitive market maximizes the social surplus and there is no role for government. When there are externalities, the market equilibrium can be improved upon.

  6. Is there a particular chapter or powerpoint file we can use for B?

  7. For the model, there is an Excel spreadheet, not a homework, on cooperation in the Prisoner's Dilemma. For the application, that is novel and something for you to work through.