A Factory Owner Wants His Workers to Produce as Many

question 60

Multiple Choice

A factory owner wants his workers to produce as many widgets as they can, so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly-made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency problem in this case?

• A)by maximising the information that the principal obtains about the behaviour of the agents
• B)by ensuring that all workers cooperate to maximise the gains of their section
• C)by supplying incentives so the agents act in the way the principal desires
• D)by making the agents into principals themselves

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Definitions:

Fallacy Of Composition

The logical error of assuming that what is true for the individual parts must also be true for the whole group.

Slippery Slope Fallacy

A logical fallacy that asserts without sufficient evidence that a relatively small first action leads inevitably to a chain of related (negative) events.

Predicted Outcome

A predicted outcome is the expected result of an experiment or model, often based on theoretical insight or previous data.

Hasty Generalization

A fallacy in which a conclusion is not logically justified by sufficient or unbiased evidence.