Ecn501 Week 1 2. Individual Problems 1-2 The owners of a small manufacturing concern have hired a vice president to run the company with the expectation that he will buy the company after five years. ...

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Ecn501
Week 1
2. Individual Problems 1-2
The owners of a small manufacturing concern have hired a vice president to run the company with the
expectation that he will buy the company after five years. Compensation of the new vice president is a
flat salary plus 75% of the first $150,000 profit, then 10% of profit over $150,000. The goal of the
owners of the firm is to maximize profits.
True or False: This contract does not align the incentives of the new vice president with the
profitability goals of the firm's owners.
True
False
Points:
1 / 1
Close Explanation
Explanation:
This contract does not incentivize the vice president to increase profits and reach the firm's profitability
goals. Since the vice president keeps $0.75 of each dollar earned up to $150,000, he has a strong
incentive to increase profits up to $150,000. However, since he only keeps $0.10 of each dollar earned
after $150K, there are weak incentives to increase profit beyond $150,000. Moreover, increasing profit
likely becomes more difficult as the overall level of profit rise. That is, earning the first $150,000 in
profit likely requires less effort than earning profit levels in excess of $150,000. Since the percentage
of profit that the vice president receives decreases at higher levels of company profit, the contract
does not align the incentives of the vice president with profit goals of the firm.
4. Individual Problems 1-4
In a 2015 National Bureau of Economic Research (NBER) working paper, researchers found that
decreases in unemployment benefits lead to higher employment.
Which of the following arguments best explains the findings of this paper?
Decreasing unemployment benefits increases incentives to remain unemployed.

Decreasing unemployment decreases the costs of remaining unemployed.
Decreasing unemployment benefits reduces incentives to remain unemployed.
Points:
1 / 1
Close Explanation
Explanation:
Unemployment benefits include cash payments to individuals to help them pay for basic needs
(including housing and food) during periods of unemployment. However, cash payments to the
unemployed increase the benefits of being unemployed, compared with being unemployed without
unemployment benefits, and can increase the incentive for individuals to remain unemployed. This
reasoning was used to support the empirical findings of a 2015 National Bureau of Economic Research
(NBER) working paper, titled “The Impact of Unemployment Benefit Extensions on Employment: The
2014 Employment Miracle?” In that paper, researchers Marcus Hagedorn, Iourii Manovskii, and Kurt
Mitman found that a 1% decrease in the length of time individuals could collect unemployment
benefits was associated with a statistically significant increase in employment of 0.019 log points. The
researchers concluded that 2.1 million individuals secured employment in 2014, due to the decrease in
unemployment benefits, and that more than 1.1 million of these workers would not have participat