Use the following information for questions 1, 2, and 3.
Suppose compensation is given by W = 550,000 + 225∏ + 15S, where W = total compensation of the CEO, ∏ = company profits (in millions) = $300, and S = Sales (in millions) = $500.

1			How much will this CEO be compensated?
			A)	$117,000.
			B)	$667,000.
			C)	$625,000.
			D)	None of the above.
2			What percentage of the CEO's total earnings are tied to profits of the firm?
			A)	10.8%.
			B)	0.6%.
			C)	16.9%.
			D)	1.2%.
3			What percentage of the CEO's total earnings are tied to the sales of the firm?
			A)	10.8%.
			B)	0.6%.
			C)	16.9%.
			D)	1.2%.
4			Given that franchise restaurants use profit sharing compensation schemes for managers, while company-owned restaurants use flat annual salaries, we should expect that
			A)	profits are lower in franchise restaurants.
			B)	profits are lower in company-owned restaurants.
			C)	profits are equal in both types of restaurants.
			D)	profit comparisons can not be made based on the given information.
5			Which of the following is an outside incentive that forces managers to put forth maximal effort?
			A)	Profit sharing contracts.
			B)	Performance bonuses.
			C)	Managerial reputation.
			D)	Piece rate compensation.
6			Which of the following forms of payment is an incentive plan?
			A)	Paying a typist a fixed hourly wage.
			B)	Allowing pizza delivery drivers to collect tips.
			C)	Straight hourly wages for construction workers.
			D)	None of the above.
7			In general, long-term contracts can be beneficial because they
			A)	raise transaction costs.
			B)	increase flexibility.
			C)	decrease the need to re-negotiate.
			D)	None of the above.
8			The activity known as shirking is least likely to occur when
			A)	workers are monitored through spot checks.
			B)	the earnings of a worker are un-related to the worker's output.
			C)	all workers are paid the same wage rate.
			D)	firm ownership is separated from the managerial control.
9			If a firm manager has a base salary of $85,000 and also gets 1.5% of all profits, how much will his/her income be if revenues are $15,000,000 and profits are $9,000,000?
			A)	$135,000.
			B)	$220,000.
			C)	$225,000.
			D)	$310,000.
10			Often when workers are compensated using a piece rate plan, they tend to
			A)	under-produce the good.
			B)	have no incentive to work hard.
			C)	put emphasis on quantity over quality.
			D)	shirk more often than if they are paid fixed hourly wages.
11			Generally, revenue-based incentive schemes
			A)	increase incentive to produce low-quality products.
			B)	decrease incentives to minimize costs.
			C)	reduce worker productivity.
			D)	increase the occurrence of shirking.
12			Which type of compensation mechanism is not considered a reward pay system?
			A)	Profit sharing.
			B)	Piece rate.
			C)	Revenue sharing.
			D)	Spot check.
13			Profit sharing tries to induce worker effort by
			A)	tying worker compensation to the underlying firm profitability.
			B)	making employee wages a function of revenues.
			C)	linking worker output to profitability.
			D)	giving performance bonuses that are some fraction of the firm's underlying revenues.
14			As firms increase in size, they tend to experience
			A)	a decrease in the need for managers.
			B)	an increase in opportunity costs.
			C)	a decrease in transaction costs.
			D)	None of the above.
15			Which of the following is a transaction cost associated with using inputs?
			A)	The property taxes paid on a building owned by the firm.
			B)	The wages paid to labor.
			C)	The time spent negotiating labor contracts with union workers.
			D)	The rental costs on a machine.