Risk Aversion by Managers Should Be Recognized When Revising Compensation

question 17

Multiple Choice

Risk aversion by managers should be recognized when revising compensation plans because:

• A) Compensation mix (salary, bonus) can influence a manager's risk aversion.
• B) Most companies want risk averse managers.
• C) Most companies want risk taking managers.
• D) It costs less to pay risk averse managers.

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Definitions:

Marginal Cost

The added total cost resulting from the manufacture of one more unit.

Producer Surplus

The difference between what producers are willing to accept for a good versus what they actually receive, often represented as the area above the supply curve and below the equilibrium price.

Output Tax

A tax imposed based on the quantity of goods or services produced.

Marginal Cost Curve

A graphical representation that shows how the cost of producing one additional unit varies as production increases.