A certain division of an auto finance company is notorious for repossessing cars. Upper management wants to change this perception, so they issue a challenge to the division. If the division does not repossess any cars this month, everyone in the division receives a $500 bonus.

1. What is the most likely result of this incentive scheme? The division

a. continues to repossess cars at its normal rate because this is their most profitable behavior.

b. increases repossessions this month because the employees do not like management.

c. reduces repossessions this month but next month repossessions either return to their average rate or increase.

d. increases repossessions this month to earn the bonus.

Suppose that the government's top priority is instead to maximize the quality of the orphanage and to make sure that the orphans will have three healthy meals a day, opportunities to learn, and a sanitary place tolive.

2. Which option should they choose? Assume that reductions in quality lowercosts.

a. They should chooseneither.

b. They can choose either; it will notmatter.

c. They should choose privatecontrol.

d. They should choose publiccontrol.

Suppose Kay, a teacher known to use very ineffective methods, wants to incentivize her students to get better grades, as the principal has informed her that she will be fired if her class does not reach an acceptable gradeaverage.

3. If Kay's goal is to raise the grade average in the class, which of the incentive schemes would not help Kay achieve this result?

a. allow cheating in the class

b. grade on an absolute scale

c. curve everyone who does not pass to a passing grade

d. offer to pay students if they make particular grade cutoffs

Using one of the schemes given, Kay's class gets the highest average grades in the school. However, her principal fires her instead of rewarding her, as Kay's solution did not do anything to improve her class' comprehension of thematerial.

4. What does this say about incentives?

a. Incentive schemes need to be carefully designed to get what you actually want.

b. Strong incentives are always better than weak incentives.

c. Weak incentive plans are better suited when measuring quality.

d. None of the above.