Refer to Chapter 6- The Organization of the Firm

Answer the following problems:

1. Discuss the optimal method for procuring inputs that have well-defined and measurable
quality specifications and require highly specialized investments. What are the primary
advantages and disadvantages of acquiring inputs through this means? Give an example
not used in the textbook that uses this method of procurement.

2. Discuss the optimal method for procuring a modest number of standardized inputs that
are sold by many firms in the marketplace. What are the primary advantages and
disadvantages of using this method to acquire inputs? Give an example not used in the
textbook that uses this method of procurement.

3. Describe how a manager who derives satisfaction from both income and shirking
allocates a 10-hour day between these activities when paid an annual, fixed salary of
$125,000. When this same manager is given an annual, fixed salary of $125,000 and 3
percent of the firm’s profits—amounting to $150,000 per year—the manager chooses to
work seven hours and shirks for three hours. Explain which of the compensation schemes
the manager prefers.

4. Compare the advantages and disadvantages of using spot checks/hidden video cameras in
the workplace and pay-for-performance pay schemes as means to influence worker
performance.