Suppose the plant owners design an incentive scheme for the plant manager in which the feasible production level is set equal to output from the previous quarter. The bonus payment is determined by the formula B = 0.2Qf + 0.2(Q - Qf).
What potential problems can arise with this scheme? A) If Qf is unusually large, then the manager has little incentive to work hard during the following quarter because Q will likely fall back below Qf.
B) If Qf is unusually small, then the manager will receive a small bonus regardless of their efforts during the current quarter.
C) The manager has an incentive to underperform and generate a small Q during the current quarter in order to provide a smaller benchmark for performance in the next quarter.
D) The incentive scheme only depends on current output and does not measure performance relative to feasible production.
Question 2
Refer to Scenario 13.16. If the firms must choose their prices simultaneously,
A) both firms will buy gelato.
B) both firms will buy yogurt.
C) two pure strategy equilibria exist, one in which Gooi alone buys a gelato machine and one in which Ici alone buys a gelato machine.
D) the game has no pure strategy equilibrium.
E) the game has no mixed strategy equilibrium.
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