Some firms provide stock options to managers as an incentive to work hard and increase the value of the firm. A typical option contract gives the manager the right to buy the firm's stock at a set price (known as the exercise price)
If the firm's stock value increases and moves above the exercise price, then the manager's option becomes more valuable. What is the potential problem with this incentive scheme? A) The incentive does not include a performance benchmark, so it cannot be optimal.
B) There is a dynamic incentive problem --- the manager may focus too much on the firm's short-run stock value and not on actions that are in the best interest of the firm for the long run.
C) The incentive value depends on the firm's stock value, which cannot be influenced by the amount of work or effort exerted by the manager.
D) There are no problems with this incentive scheme.
B
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A government that generates revenue mostly through an inflation tax faces the risk of:
A) rapidly falling prices. B) hyperinflation. C) mass tax evasion. D) a sudden fall in revenue.
List two ways the labor force experience is different between workers in Europe and in the United States. How do these differences influence productivity?
What will be an ideal response?
From an economic viewpoint, the optimal amount of pollution:
a. is zero since all pollution imposes costs on society. b. is that amount which firms create when they maximize economic profits by setting their marginal private costs equal to market price. c. is that amount where the marginal social costs of producing a good precisely equals the price of the good. d. b and c are correct.
According to monetary theories of the business cycle, fluctuations are
a. independent of the banking system. b. more prevalent in countries with modern banking systems. c. more prevalent in agricultural countries. d. less prevalent in those countries with modern banking systems.