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NAME:
____________________________
SID:
________________________
The University of Sydney
Hierarchies, incentives and firm structure ECOS 3003
Midsemester exam
Instructions
Answer the multiple choice questions on the answer sheet provided with a pencil.
Time:
60 minutes
Permitted materials:
Nonprogrammable 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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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 Uform is more desirable in large, diversified firms.
b. The Uform is less desirable in small, singleproduct firms
c. The Mform is more desirable in unstable technological environments
d. The Mform is less desirable in large, diversified firms.
e. No firm would wish to use a Uform 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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 Three '10
 andrewwait
 Economics, Game Theory, Firm

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