MGT 499 Exam 1(Correctly solved)
Define causality correct answers the relationship between cause and effect, X causes Y if three conditions
are met
"Mill's Law"
Three criteria for defining causality correct answers 1. x and y correlate
2. x precedes y
3. change in x correlates with change in y
Why may correlation not be causality correct answers 1. reverse causality
2. omitted common third variable
3. pure random covariance
reverse causality correct answers X correlates with Y,
but it may be the case that Y causes X
instead of the other way around
example: A research finds that wine consumption is positively related to career success.
omitted common third variable correct answers Common third factor or omitted variable
Example: Education positively
correlates with wage.
pure random covariance correct answers Total randomness
Example: when I grew, Chinese economy grew
--Did I cause Chinese Economy to grow?
,2 primary ways to establish causality correct answers randomized experiment and deductive reasoning
The gold standard of establishing causality correct answers randomized experiment
randomization correct answers Ideally, every potential subjects has the same
probability of getting either the control or the treatment group.
lucky draw, computer selection
what are treatment and control groups? correct answers control group: used as a baseline measure, does
not receive treatment
treatment group: the item or subject that is manipulated.
deductive reasoning correct answers if a theory is correct, we should expect a list of testable
manifestations (or hypotheses)
Example: Theory about the extinction of dinosaurs:
--Meteors hit the earth to cause mass environmental changes to destroy habitats for dinosaurs.
Agency Problem correct answers the possibility of conflict of interest between the owners and
management of a firm
Agency-Principal Relationship correct answers Agent=Manager
Principal=Owner
Relationship between managers (agency) & shareholders (principle)
In essence, owners pay money in
exchange for management expertise.
, Why does agency problem arise? correct answers Divergence of interest between managers and
owners (shareholders)
When managers don't maximize shareholder's interests
main agency problems correct answers 1) adverse selection
2) moral hazard
3) cognitive biases
Adverse Selection correct answers Managers may misrepresent
their abilities so that owners end up hiring less
capable managers
--Condition for adverse selection: information
asymmetry—owners do not have enough
information about managers
--Other examples: pizza buffets attract big eaters;
insurance companies attract accident- or disease-
prone applicants
moral hazard correct answers managers do not do what they
agree to do
--Condition: their interest diverges from that of
owners & information asymmetry about their
behaviors
(1) short-term view: managers tend to maximize their current gains instead of making long-term
investment
(2) seek higher compensation
(3) seek power and prestige
Define causality correct answers the relationship between cause and effect, X causes Y if three conditions
are met
"Mill's Law"
Three criteria for defining causality correct answers 1. x and y correlate
2. x precedes y
3. change in x correlates with change in y
Why may correlation not be causality correct answers 1. reverse causality
2. omitted common third variable
3. pure random covariance
reverse causality correct answers X correlates with Y,
but it may be the case that Y causes X
instead of the other way around
example: A research finds that wine consumption is positively related to career success.
omitted common third variable correct answers Common third factor or omitted variable
Example: Education positively
correlates with wage.
pure random covariance correct answers Total randomness
Example: when I grew, Chinese economy grew
--Did I cause Chinese Economy to grow?
,2 primary ways to establish causality correct answers randomized experiment and deductive reasoning
The gold standard of establishing causality correct answers randomized experiment
randomization correct answers Ideally, every potential subjects has the same
probability of getting either the control or the treatment group.
lucky draw, computer selection
what are treatment and control groups? correct answers control group: used as a baseline measure, does
not receive treatment
treatment group: the item or subject that is manipulated.
deductive reasoning correct answers if a theory is correct, we should expect a list of testable
manifestations (or hypotheses)
Example: Theory about the extinction of dinosaurs:
--Meteors hit the earth to cause mass environmental changes to destroy habitats for dinosaurs.
Agency Problem correct answers the possibility of conflict of interest between the owners and
management of a firm
Agency-Principal Relationship correct answers Agent=Manager
Principal=Owner
Relationship between managers (agency) & shareholders (principle)
In essence, owners pay money in
exchange for management expertise.
, Why does agency problem arise? correct answers Divergence of interest between managers and
owners (shareholders)
When managers don't maximize shareholder's interests
main agency problems correct answers 1) adverse selection
2) moral hazard
3) cognitive biases
Adverse Selection correct answers Managers may misrepresent
their abilities so that owners end up hiring less
capable managers
--Condition for adverse selection: information
asymmetry—owners do not have enough
information about managers
--Other examples: pizza buffets attract big eaters;
insurance companies attract accident- or disease-
prone applicants
moral hazard correct answers managers do not do what they
agree to do
--Condition: their interest diverges from that of
owners & information asymmetry about their
behaviors
(1) short-term view: managers tend to maximize their current gains instead of making long-term
investment
(2) seek higher compensation
(3) seek power and prestige
