Managerial Economics and Organizational Architecture, (Irwin Economics) 6th Edition Test Bank

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Chapter 01-Introduction1Chapter 01IntroductionEssay Questions1.Enron was clearly a company riddled with fraud and its conduct drove it to bankruptcy. Thetext argues that individual behavior was not the core of Enron's problems. What were theproblems with thiscorporation from an organizational architecture point of view?Answer:Enron delegated an extraordinary amount of decision rights to lower-levelemployees.At the same time, Enron lacked effective oversight and review of decisions madeby these employees.Second, performance was evaluated largely on near-term earningsgrowth and success in closing deals. Third, the company offered enormous compensation toits top performers, which encouraged excessive risk taking.Thecompany'sinternal riskmanagement groupwas in charge of performance evaluations, but the performance appraisalswithin the groupwere based in part on the recommendations of the individuals making thedeals.

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Chapter 01-Introduction2Difficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic:Introduction2.What arethethreecritical aspectsofcorporate organization? Whichof the threecomponents is most important for the success of a firm?Answer: The threecritical aspectsofcorporate organizationare the assignment of decisionrights, the reward system, and the performance-evaluation system.The assignment of decisionrights is likely to be most important for the success of a firm.Difficulty: 02 MediumBlooms: UnderstandAACSB:Reflective ThinkingTopic: Managerial Economics and Organizational Architecture3.What are some of the ways in which risky borrowers cheated on housing loans?Answer:Borrowers overstated their income and claimed "liar loans." Fraudulent borrowerswould recruit people to apply for more liar loans, provide unreliable home appraisals,purchase homes at lower prices from the sellers,and pocket the difference.Difficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture4.What was the main reason for "liar loans" to proliferate?Answer:The incentives to mortgage brokers were such that the more loans they generated,thegreaterwastheir compensation.Therefore, the mortgage brokers had no incentive to gobehind the scenes to check the viability of repayment.Difficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture5.Is there a relationship between a CEO's retirement and the R&D expenses in a firm?

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Chapter 01-Introduction3Answer:There is. In many instances, a CEO reduces R&D expenses a few years beforeretirement. This boosts earnings in these selected years. If the CEO's bonusesarelinked toearnings, then the CEO retires with a big package from reduced R&D, while the firm suffersin the long run due tothefailureofkeepingup with innovation.Difficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture6.DHL, a successful European company, is attempting to overcome various legalproblems in order to enter the U.S.marketofovernight package delivery. Its two majorcompetitors would be FedEx and UPS. As DHLlooks to set up a U.S.subsidiary, it wishes tobenchmark its organizational architecture. What should it do?Answer: DHL should realize that a successful organizational architecture is more than acollection of good ideas or good parts. A successful organization should be carefullycoordinated to align individuals' incentives with the firm's goals. DHL's organizationalarchitecture has survived in a European legal and regulatory environment. In contrast,FedEx’sand UPS’sarchitectures have survived under the U.S.legal system in the marketforovernight delivery. There is no single "best" organizational form for all firms in all externallegal and market environments. Instead,the best organizational form for a firm dependscritically on its current business environment. DHL should be aware of possible unintendedsideeffectsofchanging one component of organizational architecture without considering itseffects on theotherparts of organizational architecture.Difficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic:Economic Darwinism7.How can good management practices be useful in a global economy?Answer: The example of Tianjin Optical & Electrical Communication Group in China and itscollaboration with Motorola comes tomind. Tianjin was a failing company. But,with theadoption of U.S.telecommunications quality-control and management practices, it hassucceeded. Joint ventures such as these are likely to be useful if the foreign companies adoptU.S.management tools in termsofsupervision, control,and rewards.Difficulty: 02 MediumBlooms: UnderstandAACSB: Reflective Thinking

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Chapter 01-Introduction4Topic:Purpose of the Book8.Explain why the top executives ofSociété Généraleare more likely tobeblamedthanJérômeKerviel.Answer:Kerviel had been playing the markets for over a year and several red flags wereignored by thebankmanagers. The supervisors accepted Kerviel's trades without muchdifficulty. The managers were ready to go along, as long as Kerviel was not making anymoney for himself, and as long as his activities were creating some benefit for the system.The managers had embraced a system of risk taking. It is their irresponsibility primarilythatbehooved Kerviel to behave the way he did.Difficulty: 03 HardBlooms: AnalyzeAACSB: AnalyticTopic:Purpose of theBookMultiple Choice Questions9.BloombergBusinesssums up the failure of Enron toA.September 11, 2001.B.flawed organizational design.C.too much debt.D.risky projects in India and the oil price hikes.Answer: BDifficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Introduction10.Identify a critical aspect of corporate organization.A.the assignment of decision rights within a companyB.the cost structure of thefirmC.the pricing strategies of the rival firmsD.the capita to labor ratioAnswer: ADifficulty: 01 EasyBlooms: Remember

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Chapter 01-Introduction5AACSB: Reflective ThinkingTopic: Managerial Economics and Organizational Architecture11.The authors argue that successful corporations assign decision rights in ways thatA.effectively link decision-making authority with good information.B.structuremoneymakingtools for all employees.C.completelyeliminate the potential for fraud.D.rely on monitoring and evaluation for all creativity.Answer: ADifficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic: Managerial Economics and Organizational Architecture

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Chapter 01-Introduction612.According to the text, successful firms tend to set upA.anorganizational architecture that is complex and decisions are "top-down."B.anorganizational architecture that is least expensive and decisions are "top-down."C.anorganizational architecture that links decisionmaking with decision rights.D.an organizational architecture that keepsdecisionrights reserved for the seniormanagement.Answer: CDifficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture13.The example of Enron shows thatA.selection of people isthe key to organizational success or failure.B.large incentivesplay an important role in motivating people within a corporation.C.thesuccessof a businessis possible in a regulatory environment.D.organizational structure is extremely important in business success.Answer: DDifficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic: Managerial Economics and Organizational Architecture14.Economics provides a theory to explainA.howasuccessful business can be started.B.how managers can cheat and get away with it.C.how people make choices.D.howbusinessescompete in the market.Answer: CDifficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture15.Recent research on CEO behavior tells us that CEOs generallyA.increase theirfirm’sR&D expenditure so as to boost earnings long before they retire.B.reduce theirfirm’sR&D expenditure so as to boost earnings long before they retire.C.reduce theirfirm’sR&D expenditure so as to boost earnings just before they retire.D.increase theirfirm's R&D expenditure so as to boost earnings just before they retire.

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Chapter 01-Introduction7Answer: CDifficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture16. Which of the following is trueofstandardeconomic analysis?A.It characterizes a firm as a black box that transforms inputs to outputs.B. It focuses on the internal architecture of a firm.C. It applies basic economic tools to examine the effects of managerial decisions.D.It characterizes a firm as an organization that generates economic growth.Answer: ADifficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture17."Subprime mortgages" refer toA.interest rates that are over and above the prime rate to risky borrowers.B.mortgages made to credit-worthy borrowers at low interest rates.C.mortgages made to borrowers who do not usually qualify for loans.D.mortgage brokers making huge commissions on volume.Answer: CDifficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture18.In thetextbook, there is an example of a software firm in which the managers provided afinancial incentive to get rid of software bugs. The result was that software writers addedmore bugs into the software. This example shows thatA.financial incentives should never be used.B.most employees are corrupt.C.incentives can create perverse effects.D.high-tech firms are unique.

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Chapter 01-Introduction8Answer: CDifficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture19.If the market demand and themarketpricefor a product increase, then the reaction ofcompanies that manufacture this productA.will be identical.B.will bedependent on the prevailing tax system.C.will depend on whether or not theorganization is attuned to market incentives.D.will bedependent on the government regulatory mission.Answer: CDifficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture20.Economic Darwinism isseenwhenA.organizational architecture isoptimizedby employing new technology.B.competition weeds out ill-designed organizations that fail to adapt.C.corporate mutations occur, like Enron.D.market benchmarks are employed.Answer: BDifficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Economic Darwinism21. Which of the following is a benefit of a competitive market structure?A.efficient decision makingB.alow tax rateC.high cost ofproductionD.high market powerAnswer: ADifficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic: Economic Darwinism

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Chapter 01-Introduction922.Fama and Jensen suggest that "the form of organization that survives in an activity istheone that delivers the product demanded by customers at the lowest price while coveringcosts." This is an example ofA.market and organizational efficiency.B.market and organizational equity.C.economic benchmarking.D.defective organizational architecture.Answer: ADifficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic:Economic Darwinism23. In order to survive in a market, a firm needs toA.make extensive use of available technology.B. hire more capital and less labor.C. produce aproductdemanded by consumers at the lowest possible price while coveringcosts.D. charge higher prices for its products than its rivals and revise prices upward periodically.Answer: ADifficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic: Economic Darwinism24.The termDarwinismis important because it indicatesA.the randomness of existing companies.B.that thesurviving companies are the best intheabsolutesense.C.the capability to transform as the external environment changes.D.the existence of a higher intelligence that promotes success.Answer: CDifficulty: 02 MediumBlooms: UnderstandAACSB: Reflective Thinking

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Chapter 01-Introduction10Topic:Economic Darwinism25.Theprinciple “survival of thefittest”tells usthatA.only the most innovative and adaptive firms are likely to survive competition.B.only the most innovative and adaptive firms are likely to attract more competition.C.only the least innovative and adaptive firms are likely to survive competition.D.only the most innovative and adaptive firms are likely to migrate to other products.Answer: ADifficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Economic Darwinism26.The business practice of looking for a firm that has best practices in an area and thenemulating those practices is calledA.organizational architecture.B.benchmarking.C.competitive markets.D.decisionmanagement.Answer: BDifficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Economic Darwinism27.Benchmarking meansA.blind copyingfrom others.B.copying from the best so as to become better.C.looking at yourself and telling others what to do.D.looking at yourself and telling yourself you are the greatest.Answer: B

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Chapter 01-Introduction11Difficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Economic Darwinism28.Benchmarking may be a problem ifA.the current architecture is relatively unstable and proposed changes add huge benefits.B.the current architecture is relatively stable and proposed changes add huge benefits.C.the current architecture is relatively unstable and proposed changes add little benefits.D.the current architecture is relatively stable and proposed changes add little benefits.Answer: DDifficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic:Economic Darwinism29.If the technology, the nature of competition, or theregulatory environment change in anindustry, thenA.the appropriate organizational architecture will change too.B.a good organizational architecturewill shut down.C.theorganizational architecturewill beable to restore the former market environment.D.the industry will increase production.Answer: ADifficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic:Economic Darwinism30.From Jerome Kerviel's actions inSociétéGénérale, we realize that in a businessorganization, managers may turn a blind eye to certain "red flags"inthe system ifA.the managers themselves conduct certain illegal activities.B.the managers know that at some point these illegal activities will fail.C.the managers believethatnoworker will unnecessarily expose himself or herself.D.the managers embrace risk takingaslong as it benefits the company.

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Chapter 01-Introduction12Answer: DDifficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic:Purpose of the Book

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Chapter 01-Introduction1Chapter 01IntroductionEssay Questions1.Enron was clearly a company riddled with fraud and its conduct drove it to bankruptcy. Thetext argues that individual behavior was not the core of Enron's problems. What were theproblems with thiscorporation from an organizational architecture point of view?Answer:Enron delegated an extraordinary amount of decision rights to lower-levelemployees.At the same time, Enron lacked effective oversight and review of decisions madeby these employees.Second, performance was evaluated largely on near-term earningsgrowth and success in closing deals. Third, the company offered enormous compensation toits top performers, which encouraged excessive risk taking.Thecompany'sinternal riskmanagement groupwas in charge of performance evaluations, but the performance appraisalswithin the groupwere based in part on the recommendations of the individuals making thedeals.

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Chapter 01-Introduction2Difficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic:Introduction2.What arethethreecritical aspectsofcorporate organization? Whichof the threecomponents is most important for the success of a firm?Answer: The threecritical aspectsofcorporate organizationare the assignment of decisionrights, the reward system, and the performance-evaluation system.The assignment of decisionrights is likely to be most important for the success of a firm.Difficulty: 02 MediumBlooms: UnderstandAACSB:Reflective ThinkingTopic: Managerial Economics and Organizational Architecture3.What are some of the ways in which risky borrowers cheated on housing loans?Answer:Borrowers overstated their income and claimed "liar loans." Fraudulent borrowerswould recruit people to apply for more liar loans, provide unreliable home appraisals,purchase homes at lower prices from the sellers,and pocket the difference.Difficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture4.What was the main reason for "liar loans" to proliferate?Answer:The incentives to mortgage brokers were such that the more loans they generated,thegreaterwastheir compensation.Therefore, the mortgage brokers had no incentive to gobehind the scenes to check the viability of repayment.Difficulty: 01 EasyBlooms: RememberAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture5.Is there a relationship between a CEO's retirement and the R&D expenses in a firm?

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Chapter 01-Introduction3Answer:There is. In many instances, a CEO reduces R&D expenses a few years beforeretirement. This boosts earnings in these selected years. If the CEO's bonusesarelinked toearnings, then the CEO retires with a big package from reduced R&D, while the firm suffersin the long run due tothefailureofkeepingup with innovation.Difficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic:Managerial Economics and Organizational Architecture6.DHL, a successful European company, is attempting to overcome various legalproblems in order to enter the U.S.marketofovernight package delivery. Its two majorcompetitors would be FedEx and UPS. As DHLlooks to set up a U.S.subsidiary, it wishes tobenchmark its organizational architecture. What should it do?Answer: DHL should realize that a successful organizational architecture is more than acollection of good ideas or good parts. A successful organization should be carefullycoordinated to align individuals' incentives with the firm's goals. DHL's organizationalarchitecture has survived in a European legal and regulatory environment. In contrast,FedEx’sand UPS’sarchitectures have survived under the U.S.legal system in the marketforovernight delivery. There is no single "best" organizational form for all firms in all externallegal and market environments. Instead,the best organizational form for a firm dependscritically on its current business environment. DHL should be aware of possible unintendedsideeffectsofchanging one component of organizational architecture without considering itseffects on theotherparts of organizational architecture.Difficulty: 02 MediumBlooms: UnderstandAACSB: Reflective ThinkingTopic:Economic Darwinism7.How can good management practices be useful in a global economy?Answer: The example of Tianjin Optical & Electrical Communication Group in China and itscollaboration with Motorola comes tomind. Tianjin was a failing company. But,with theadoption of U.S.telecommunications quality-control and management practices, it hassucceeded. Joint ventures such as these are likely to be useful if the foreign companies adoptU.S.management tools in termsofsupervision, control,and rewards.Difficulty: 02 MediumBlooms: UnderstandAACSB: Reflective Thinking

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