Scenario 1

Part of a worker's pay on an automobile assembly line is based on the number of cars in a pay period that come off the worker's line and pass inspection. The remaining portion of the worker's pay is an hourly wage that is fixed and only depends on the number of hours the employee works.

How does this incentive plan align the employee's incentives with the firm's? Is the inspection necessary?
What would you recommend to management if they asked you if they should inspect each individual employee's work and pay based on the individual's work rather than whether the car passed the final inspection (that is, what are the benefits and costs of paying, for instance, the windshield installer for the number of correctly installed windshields).

What decision making ability should the worker have in order to maximize the effectiveness of the incentive plans?
Scenario 2

A large electronics company is organized into mainly profit-center divisions. The components division and the consumer electronics division are profit-center divisions of the company. The components division produces individual chips and other electronic components. The components division supplies outside vendors in addition to the consumer electronics division. The consumer electronics division

assembles components into devices sold to consumers.

Recently, there has been a dispute between the two divisions over a particular chip used in the production of a smart phone. The consumer electronics division argues that they are being overcharged because the transfer price they are being charged is significantly higher than the marginal cost of producing the chip. The transfer price includes a charge to recover fixed overhead costs as well as a mark-up to provide a profit margin for the components division. The components division argues that they need to charge a price commensurate with all their costs and that allows them to earn a reasonable profit for their output. Compounding the issue, the particular chip under dispute is available from other vendors at a price less than the transfer price but higher than the marginal cost of production.

You have been hired to suggest a solution to this problem. What would you recommend the electronics company do?

Scenario 3

Suppose you are the main negotiator between your company and retailers carrying your company's line of dairy products. Your company is attempting to introduce a new brand of Greek yogurt, and it is your responsibility to negotiate agreement between your company and retailers to ensure as much support for the launch as possible. The advertising team has designed several in-store displays that your company would like the retailers to use, but those carry a cost to the retailers to set up in terms of employee time and shelf space. The marketing team has developed a strategy that primarily revolves around an introductory price that is significantly lower than existing brands of Greek yogurt. Your company has agreed to give some financial support that you can use in whatever way you see fit or necessary to carry out the goal of a successful product launch. You are tasked to negotiate agreements with the retailers that address the plans of the advertising and marketing teams and to address any other foreseeable issues.

Briefly discuss the contractual clauses that you would offer retailers--and to which the retailers would agree--in order to accomplish your goals.