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# mid - NAME SID The University of Sydney Hierarchies...

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Page 1 of 12 NAME: ____________________________ SID: ________________________ The University of Sydney Hierarchies, incentives and firm structure ECOS 3003 Mid-semester exam Instructions Answer the multiple choice questions on the answer sheet provided with a pencil. Time: 60 minutes Permitted materials: Non-programmable calculators There are 30 marks in total in this exam. Each of the multiple choice questions are worth 1 mark (total 30 marks).

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Page 2 of 12 Part A : Multiple Choice (30 marks – each question is worth 1 marks each). Instructions : Answer all 30 questions by marking the computer cards provided 1. Which of the following makes the most sense? a. The U-form is more desirable in large, diversified firms. b. The U-form is less desirable in small, single-product firms c. The M-form is more desirable in unstable technological environments d. The M-form is less desirable in large, diversified firms. e. No firm would wish to use a U-form structure. For the following three questions, consider the following delegation versus centralisation model of decision making, loosely based on some of the discussion in class. A principal wishes to implement a decision that has to be a number between 0 and 1; that is, a decision d needs to be implemented where 01 d ≤≤ . The difficulty for the principal is that she does not know what decision is appropriate given the current state of the economy, but she would like to implement a decision that exactly equals what is required given the state of the economy. In other words, if the economy is in state s (where s ) the principal would like to implement a decision d = s as the principal’s utility U p (or loss from the maximum possible profit) is given by P Us d =− . With such a utility function, maximising utility really means making the loss as small as possible. For simplicity, the two possible levels of s are 0.4 and 0.7, and each occurs with probability 0.5. There are two division managers A and B who each have their own biases. Manager A always wants a decision of 0.4 to be implemented, and incurs a disutility U A that is increasing the further from 0.4 the decision d that is actually implement, specifically, 0.4 A Ud . Similarly, Manager B always wants a decision of 0.7 to be implement, and incurs a disutility U B that is (linearly) increasing in the distance between 0.7 and the actually decision that is implemented - that is 0.7 B . Each manager is completely informed, so that each of them knows exactly what the state of the economy s is. 2. The principal can opt to centralise the decision but before making her decision – given she does not know what the state of the economy is – she asks for recommendations from her two division managers. Centralisation means that the principal commits to implement a decision that is the average of the two recommendations she received from her managers. The recommendations are sent simultaneously and cannot be less than 0 or greater than 1.
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mid - NAME SID The University of Sydney Hierarchies...

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