Identify whether each of the following transactions involves spot exchange, contract, or vertical integration.

a. Barnacle, Inc., has a legal obligation to purchase 2 tons of structural steel per week to manufacture conveyor frames.

b. Exxon-Mobil uses the oil extracted from its wells to produce raw polypropylene, a type of plastic.

c. Boat Lifts R Us purchases generic AC motors from a local distributor.

d. Kaspar Construction-a home-building contractor-purchases 50 pounds of nails from the local Home Depot.

What is the impact of the following factors on the optimal method of procuring an input.

a. Benefits from specialization.

Reduce the benefits of contracts.
Increase the benefits of vertical integration.
Reduce the benefits of vertical integration.
Reduce the benefits of spot exchange.

b. Bureaucracy costs.

Reduce the benefits of vertical integration.
Reduce the benefits of contracts.
Reduce the benefits of spot exchange.
Increase the benefits of vertical integration.

c. Opportunism on either side of the transaction.

Lead to the use of spot exchange.
Lead to less detailed contracts.
Lead to contracts that are more detailed or vertical integration.

d. Specialized investments.

Make vertical integration unattractive.
Make contracts unattractive.
Make spot exchange unattractive.

e. Unspecifiable events.

Make contracts unattractive.
Make vertical integration unattractive.
Make spot exchange unattractive.

f. Bargaining costs.

Lead to longer contracts or vertical integration.
Lead to spot exchange.
Lead to shorter contracts.

Andrew has decided to open an online store that sells home and garden products. After searching around, he chooses the software company Initech to provide the software for his website since their product required the least amount of specialized investments for him to use it. They agreed upon price of $7,000. To use Initech's software, Andrew makes $3,000 in sunk capital investments and spends 70 hours learning how to use Initech's software, which is very different from other software packages. Both Andrew and Initech view Andrew's time as worth $25 per hour and Initech is fully aware of the investments Andrew must make to use their product. After Andrew's investments were made, Initech came to Andrew and asked for more money. How much do you think they asked for?

Suppose the marginal benefit of writing a contract is $70, independent of its length. Find the optimal contract length when the marginal cost of writing a contract of length L is:

Instruction: Round your answers to 2 decimal places.

a. MC(L) = 40 + 2L.

b. MC(L) = 20 + 5L.

c. What happens to the optimal contract length when the marginal cost of writing a contract declines?

Describe how a manager who derives satisfaction from both income and shirking allocates a 10-hour day between these activities when paid an annual, fixed salary of $110,000.

Time spent working: hours

Time spent shirking: hours

When this same manager is given an annual, fixed salary of $110,000 and 5 percent of the firm's profits-amounting to a total salary of $150,000 per year-the manager chooses to work 8 hours and shirks for 2 hours. Given this information, which of the compensation schemes does the manager prefer?

The manager is indifferent between the two payment schemes.
The scheme with only a fixed payment of $110,000.
The scheme with fixed payment of $110,000 and a percentage of profits.

Recently, the owner of a Trader Joe's franchise decided to change how she compensated her top manager. Last year, she paid him a fixed salary of $65,000 and her store made $135,000 in profits (not counting payment to her top manager). She suspected the store could do much better and feared the fixed salary was causing her top manager to shirk on the job. Therefore, this year she decided to offer him a fixed salary of $32,000 plus 15% of the store's profits. Since the change, the store is performing much better, and she forecasts profits this year to be $270,000 (again, not counting the payment to her top manager). Assuming the change in compensation is the reason for the increased profits, and that the forecast is accurate, how much more money will the owner make (net of payment to her top manager) because of this change?

Does the manager make more money under the new payment scheme?

When choosing between spot checks/hidden video cameras in the workplace and pay-for-performance pay schemes to influence worker performance:

Which of these two options may adversely affect the morale of the workers?

Pay-for-performance pay schemes

Which of these two options will require more employees in order to be effective?

Pay-for-performance schemes

Which of these two options will be less effective when output is a function of group performance?

Spot checks/hidden video cameras

EFI-a material handling company-pays each of its salespersons a base salary plus a percentage of revenues generated. To reduce overhead, EFI has switched from giving each salesperson a company car to reimbursing them $0.35 for each business-related mile driven. Accounting records show that, on average, each salesperson drives 100 business-related miles per day, 240 days per year. Which of the following options for restructuring the compensation of EFI's sales force would most likely enhance profits?

Pay a salesperson a base salary only.
Increase the reimbursement for each business-related mile driven.
Pay a salesperson a base salary plus a percentage of the profits.
Decrease the reimbursement for each business-related mile driven.