Questions(•Chapter 1: Problems 2, 3, and 6)
1. What is the maximum amount it would be worth to shareholders to elicit high
CEO effort all of the time rather than low CEO effort all of the time?
2.If you decide to pay 1 percent of this amount (in Question 1) as a cash bonus,
what performance level (what share price or shareholder value) in the table
should trigger the bonus? Suppose you decide to elicit high CEO effort when,
and if, medium luck occurs by paying a bonus should the company’s value rise
to $800,000,000. What criticism can you see of this incentive contract plan?
3. Suppose you decide to elicit high CEO effort when, and if, good luck occurs by
paying a bonus only for an increase in the company’s value to $1,000,000,000.
What criticism can you see of this incentive contract plan?
6. Design a stock option-based incentive plan to elicit high effort. Show that 1 million
stock options at a $70 exercise price improves shareholder value relative to
the best of the cash bonus plans in Questions 2, 3, or 4.
4. Suppose you decide to elicit high CEO effort when, and if, bad luck occurs by
paying the bonus when the company’s value falls to $500,000. What criticism
can you see of this incentive contract plan?
Questions (•Chapter 2: Problems 1, 5, and 6)
1. Make a list of some of the issues that will need to be resolved if American Airlines
decides to routinely charge different prices to customers in the same class of
2. Would you expect these revenue management techniques of charging differential
prices based on the target customers’ willingness to pay for change order responsiveness,
delivery reliability, schedule frequency, and so forth to be more effective
in the trucking industry, the outpatient health care industry, or the hotel industry?
Why or why not?
3. Sometimes when reservation requests by deep discount travelers are refused, demanders
take their business elsewhere; they “balk.” At other times, such demanders
negotiate and can be “sold up” to higher fare service like United’s Economy
Plus. If United experiences fewer customers balking when reservation requests for
the cheapest seats are refused, should they allocate preexisting capacity to protect
fewer seats (or more) for late-arriving full-fare passengers?
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