The bonus of a plant manager in a vertically integrated firm is based on the following formula:
Bonus = 10,000 - 0.5(Qf - Q)
where Qf is feasible production and Q is actual production. The value for Qf is provided by the plant manager at the beginning of the year. With this scheme, the plant manager has an incentive:
A) to underestimate Qf.
B) to overestimate Qf.
C) to reveal the true Qf and make Q as small as possible.
D) to reveal the true Qf and make Q as large as possible.
Question 2
Refer to Scenario 8.2. The result of the tax in the long run will be that
A) Q falls from 30,000; P rises by less than 20,000.
B) Q falls from 30,000; P rises by 20,000.
C) Q falls from 30,000; P does not change.
D) Q stays at 30,000; P rises by 20,000.
E) Q stays at 30,000; P rises by less than 20,000.
