What is the role of the "informativeness principle" in designing a compensation package for an individual in a corporate environment?
What will be an ideal response?
The informativeness principle states that it is optimal to include in the compensation contract all indicators that provide additional information about the employee's effort, assuming the measures are available at low cost. This principle hinges on the desirability of separating out true effort from random elements that affect employees' output. In a corporate environment, many individuals or units may have specific knowledge that may be brought to bear on another's performance. If this knowledge can be obtained at low cost, then in theory it should be used in determining compensation. One possibility is to use information about similar individuals' output in a relative performance contract. Another possibility is to use peer evaluation. In addition, it may be worthwhile for the firm to spend money to develop more precise measures of performance so long as the improved measurements can motivate significantly more effort.
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An economic slow-down would cause the labor:
A. demand curve to shift left. B. demand curve to shift right. C. supply curve to shift left. D. supply curve to shift right.
A decrease in the price level will result in:
a. a downward shift of the AD curve. b. an upward shift of the AD curve. c. a movement up the AD curve. d. a steeper slope of the AD curve. e. a movement down the AD curve.
Considering the theory of purchasing power parity, if inflation in Mexico is 5% while prices in the U.S. are stable; we should expect over the period of a year:
A. the dollar to appreciate 5% relative to the peso. B. the peso to appreciate 5% relative to the dollar. C. the real exchange rate of U.S. goods / Mexican goods to appreciate 5%. D. the nominal exchange rate to stay fixed.
Related to the Economics in Practice on page 198: If firms have long-run average cost curves with a long, flat section
A. the optimal number of firms in the industry is one. B. their long run supply curves are downward sloping. C. it is impossible to predict the size of the firm. D. larger firms have a cost advantage over smaller firms.