"Organization in Concept and Practice"
• Analyze the potential downfalls of any team effort (e.g., free riders) and make at least one recommendation for minimizing risk. Provide specific examples to support your response.
• Describe a company you would like to start and determine which form of ownership would be most appropriate given your current financial status. Explain your rationale.
1. Why does the assumption of independence of risks matter in the examples of insurance? What would happen to premiums if the probabilities of houses burning were positively correlated? Can you think of a situation where they might be negatively correlated?
2. Small firms can discover the abilities of their workers more quickly than large onesbecause they can observe the workers more closely at a variety of tasks. Does itthen make sense for people with high abilities to go to small firms? Give somereasons why and some reasons why not.
3. In some ways monitoring is easier in a partnership than a corporation, whereshareholders monitor directors. In what ways is monitoring easier? In what ways isit not?
4. A friend convinces you that she has a great idea for a business, and the two of youincorporate. You supply her with funds and let her make all of the executivedecisions. Under the agreement you hold 30 percent of the firm's stock and yourfriend holds 70 percent. Why should you ever put yourself into a position whereyour friend's decision will carry the day, whether you agree with her or not? Whatdoes this tell you about problems that allegedly stem from separation of ownershipand control?