1. Explain how offering a compensation plan that gives managers a discount on stock purchases could help managers take the owner's interests into account. While such compensation schemes are common, these contracts typically specify a vesting period. The vesting period is the amount of time that must pass before the options can be exercised. The employee cannot exercise the options (buy and sell the stock) until the stock is vested. Why would firm owners not want managers to get full option rights immediately?
2. For a large firm where owner oversight is difficult, would it be more advantageous to form a corporation or a proprietorship? Explain.
3. What is a vertical merger? How can a vertical merger between two firms impede competition in the downstream industry? Consider the case where there is one supplier of an intermediate product that is demanded by two downstream firms.