The Bonus of a Plant Manager in a Vertically Integrated

question 119

Multiple Choice

The bonus of a plant manager in a vertically integrated firm is based on the following formula: Bonus = 10,000 - 0.5(Q_f - Q)
Where Q_f is feasible production and Q is actual production. The value for Q_f is provided by the plant manager at the beginning of the year. With this scheme, the plant manager has an incentive:

• A) to underestimate Q_f.
• B) to overestimate Q_f.
• C) to reveal the true Q_f and make Q as small as possible.
• D) to reveal the true Q_f and make Q as large as possible.

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Definitions:

Units of Guns

A quantification measure commonly used to denote the production or stockpile of firearms or, by extension, military capacities.

Units of Butter

A measure of quantity for butter, which can be used in economic examples to illustrate the concept of trade-offs or opportunity costs.

Opportunity Cost

The expense incurred by not selecting the superior alternative available when a different choice is made.

Opportunity Cost

Opportunity cost is the cost of foregoing the next best alternative when making a decision, representing the benefits that could have been gained by choosing the alternative option.