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5. Princpal-agent problems:

a. occur when firm managers have more incentive to maximize profit than shareholder do.

b. would be reduced if firm owners had better information about the actions of the firm's managers.

c. help explain why equity investments from outside owners are an important finanicing source for firms.

d. are increased as more information is shard between the parties

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Related questions

3. Principal-agent relationships:

a. reduce monitoring costs

b. occur because managers have good informaiton about employees.

c. are not related to asymmetric information

d. are subject to moral hazard problems.

5. Princpal-agent problems:

a. occur when firm managers have more incentive to maximize profit than shareholder do.

b. would be reduced if firm owners had better information about the actions of the firm's managers.

c. help explain why equity investments from outside owners are an important finanicing source for firms.

d. are increased as more information is shard between the parties

6. In order to create an effective incentive compensation scheme, you must have

a.adequate performance measures

b. unlimited funds

c. a flat management structure

d. None of the above

orangealligator623

Question 1

Which compensation method helps to explain the large difference between the salaries of top-level managers and mid-level managers in a firm?

	A.	Tournaments
	B.	New blood
	C.	Piece rate
	D.	Backloaded compensation

3 points

Question 2

Please consider the information provided under Question 19 in Chapter 3 (page 54). Based on the stated information, the optimal number of bees kept if the externality is ignored by Yung is 5,000. Is the socially optimal number of bees higher or lower than 5,000?

	A.	We do not have enough information to answer this question
	B.	Same
	C.	Lower
	D.	Higher

3 points

Question 3

Which of the following factors contribute to the existence of firms?

	A.	All of these factors contribute to firm existence
	B.	Risks associated with specialization
	C.	Incomplete contracts
	D.	Willingness of some people to take on risk in exchange for residual income

3 points

Question 4

Public goods are often subject to free-rider problems because these goods are:

	A.	Non-rival and non-excludable
	B.	Rival and non-excludable
	C.	Non-rival and excludable
	D.	Rival and excludable

3 points

Question 5

Which of the following is the most efficient mechanism for allocating scarce goods?

	A.	Government allocation system
	B.	First-come-first-served system
	C.	Market system
	D.	Random allocation system

3 points

Question 6

Many years ago, most of the major Hollywood movie studios also owned chains of local movie theaters across the US. Today, most of the local movie theaters are owned by other companies. What has happened to the degree of integration in the movie industry over time?

	A.	Less horizontally integrated
	B.	Less vertically integrated
	C.	More horizontally integrated
	D.	More vertically integrated

3 points

Question 7

Your firm produces replacement parts for the nuclear submarines operated by the US Navy. Which one of Porter's Five Forces will be most prominent in determining your strategies and profitability?

	A.	Bargaining Power of Suppliers
	B.	Bargaining Power of Customers
	C.	Threat of New Entrants
	D.	Threat of Substitutes

3 points

Question 8

Which of the following statements is NOT true?

	A.	The market mechanism for allocating resources is most efficient due to the incentives it creates.
	B.	Markets are always the most efficient way to allocate goods, even if the market is not perfectly competitive.
	C.	The random allocation mechanism provides no incentives at all.
	D.	The government allocation mechanism provides no incentive for the economy to grow.

3 points

Question 9

Suppose a firm's cost structure exhibits economies of scope. Which of the following actions is compatible with this cost structure?

Diversify into other product lines

Focus on core competencies and reduce production

Focus on core competencies and maintain constant production

Focus on core competencies and expand production

Question 10

Please refer to Table 8.3 on page 132 in the book. Suppose we change the payoffs in the "low price, low price" cell to 0, 25 from 0, 0. Does this change the Nash equilibrium for the game, and is the game still a Prisoner's Dilemma?

	A.	Equilibrium changes, still a Prisoner's Dilemma
	B.	Equilibrium changes, no longer a Prisoner's Dilemma
	C.	Same equilibrium, no longer a Prisoner's Dilemma
	D.	Same equilibrium, still a Prisoner's Dilemma

3 points

Question 11

Which of the following statements about restricting entry to markets is NOT true?

	A.	Brand identity and logos are expensive to establish, and entrants may find it very expensive to establish comparable position in the market.
	B.	Predatory pricing is illegal but very difficult to prove in court
	C.	Branded products tend to have more elastic demand, which makes it more difficult for entrants to charge high prices and they must stay out of the market.
	D.	A low-quality seller cannot effectively use a warranty program to keep other firms out of its market

3 points

Question 12

Your firm earns $2 million per quarter in total revenue, and your accounting profits are $100,000 per quarter. You do not charge the firm for the use of an old building that you own because it is 50 years old and fully depreciated. However, another firm has offered you $200,000 per quarter to use the facility, and this is the market rental rate for similar facilities. In this case, we know that your:

	A.	Opportunity costs are positive and economic profits are negative
	B.	Opportunity costs and economic profits are positive
	C.	Opportunity costs are negative and economic profits are positive
	D.	Opportunity costs and economic profits are negative

3 points

Question 13

Please refer to Question 13 in Chapter 1 (page 17). What is the marginal cost of reducing global warming by 0.017 degrees?

	A.	MC = 60
	B.	MC = 5
	C.	We do not have enough information to answer this question
	D.	MC = 50

3 points

Question 14

In Chapter 6, Boyes focuses on negative externalities such as the various types of pollution. However, as we discussed during our online session, we can also observe positive externalities in which external benefits are generated for people. Which of the following is NOT an example of a positive externality?

	A.	Workers can help one another to "cover the phones" and make sure that someone is always available to help clients
	B.	Workers can provide ideas to one another about how to solve problems
	C.	All of these cases are examples of positive externalities
	D.	Workers can form carpools and use other means to reduce commuting costs

3 points

Question 15

Common property resources are:

	A.	Non-rival and non-excludable
	B.	Non-rival and excludable
	C.	Rival and non-excludable
	D.	Rival and excludable

3 points

Question 16

The free-rider problem arises in markets for common property resources.

	A.	False
	B.	True

3 points

Question 17

Firms that set their product price below the actual cost of production may be engaging in:

	A.	Predatory pricing
	B.	Monopoly pricing
	C.	Moral hazard
	D.	Dollar-cost averaging

3 points

Question 18

Under a cap-and-trade mechanism to control air pollution, what happens to the price of pollution rights if the supply of righs is reduced (i.e., the supply of rights is reduced)?

Increases

Decreases

No change

Question 19

The key method for a manufacturing firm to avoid hold-up problems is to have another source of inputs.

	A.	False
	B.	True

3 points

Question 20

Your firm sells luxury autos, and you have asked the marketing department to develop and stronger brand identity through a new ad campaign. After the campaign has run for 6 months, you hire an economic consultant to study the impact of the campaign on the demand for your autos. The consultant reports that the demand for your cars is now more elastic than it was 6 months ago. Was the new ad campaign successful?

	A.	Yes
	B.	No

Minicase: How much is Manchester United's brand worth?

In recent years, the valuation of sports teams has become an increasingly important financial topic. Part of the reason is the astronomical salaries that sports stars command. Additionally, some stars become celebrities outside of the arena also, with lucrative sponsorships, extravagant lifestyles, and an icon of the rich and famous David Beckham, the British soccer player is one prominent example. As a personal brand, Beckham was valued by Forbes at $20 million in 2013 (http://www.forbes.com/pictures/mlm45jemm/4-david-beckham/). Beckham came up with Manchester United, often cited as the world's most valuable soccer club. The Red Devils, as they are called, were bought by the Glazer family from the United States in a leveraged buyout in 2005. To cash in on its brand value and pay down debt, the new owners decided to go public in 2012. The IPO on the New York stock exchange offered shares at $14 apiece, making the capitalized value of the club about $2.3 billion. The shares did poorly at first but soared in 2013. By end of January, the share price stood at just under $17, with Manchester United's stock outperforming the S&P 500. The increase in its stock price pushed up Manchester United's value (equity plus debt) to $3.3 billion, the highest value of any team in the world. But in the ensuing Champions League tournament, Manchester did not perform all that well, and the club was overtaken by competitors. One was Real Madrid, a perennial foe. The Spanish team posted greater returns in its annual report for 2012-2013, with the highest returns of any team in sports ($650 million during the 2011-2012 season), and revenues up 62% over the last 3 years. Signing superstars Cristiano Ronaldo and, more recently, Gareth Bale has led to increasing income from advertising and sponsorships as well as attendance and television. The club has an equipment supply deal with Adidas worth $42 million a year. It has signed a new sponsorship deal with Emirates Airlines to put its name on the team's shirts, a contract worth $39 million annually for 5 years. As a result, the value of Real Madrid increased to $3.4 billion, narrowly beating out Manchester United. Real Madrid did better than Manchester United in the Champions League but was still beaten in the semifinals. In the final, two German teams met. Bayern Munich, a 10-time finalist, defeated Borussia Dortmund by a score of 2-1. As a result, the winning German club vaulted to first place in the soccer team brand ratings, as published by BrandFinance, a brand equity rating firm headquartered in London that covers brand equity sports ratings. BrandFinance calculates the value of the brand equity in terms of an equivalent royalty rate: if a team would license its name to a third party, how much would it be able to charge. This allows the company to focus only on brand equity, expressed in terms of dollar value. The brand equity rankings after the 2013 Champions League final from BrandFinance show the top three teams as follows:

1. Bayern Munich - Brand value: $868 million
2. Manchester United - Brand value: $845 million
3. Real Madrid - Brand value: $627 million.

The estimated value of Bayern Munich using the enterprise value (equity and debt) calculation used for the Manchester United and Real Madrid above is about $1.3-1.5 billion. That is, the enterprise values of the three teams as of late summer 2013 are as follows:

1. Real Madrid - Team value: $3.4 billion
2. Manchester United - Team value: $3.3 billion
3. Bayern Munich - Team value: $1.3-1.5 billion

In fact, Bayern Munich is also beaten by one arch-rival, Barcelona, at $2.6 billion, and is virtually tied by London's Arsenal.

Questions:
1. Why is there a difference between the stock market valuation of a sports team and its brand value?
2. If brand equity represents allegiance to a brand, what would you say determines the brand equity of a soccer team (or any sports team)?
3. What factors would you say determine the value of a soccer team (or any sports team)?
4. Use the difference between your answers in Questions 2 and 3 to explain why Bayern Munich could lead in brand equity but still not be the most valuable team.