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- Fri Jan 21, 2011 12:00 am
#23845
Complete Question Explanation
Resolve the Paradox. The correct answer choice is (D)
First, we're given two cost plus contract models: fixed percentage, where a contractor is paid as a set percent of costs, and fixed amount, where a contractor is paid a set amount above whatever costs are reported.
Since higher contractor costs would yield higher profits under a fixed percentage type of cost plus contract—since the amount paid is directly proportional to those costs—it would be reasonable to expect a contractor might inflate the costs in order to increase profits. That is, if I'm being paid X percent of whatever I spend (or claim to spend), I'm going to spend as much as possible (or claim to) to maximize my pay out!
However, the opposite is true: under these fixed percentage contracts it's less common to find final costs in excess of the original estimate than in a fixed amount model, meaning the artificial inflation ideas described above appears not to be happening. And therein lies your paradox!
So we need a reason why that might be the case. Hard to know exactly what it will be in advance—which is fine!—but one possible cause that comes to mind (for a lot of students, anyway) is a potential difference in oversight between the two types of contracts: if clients are far more attentive to costs when they know they'll be paying contractors based on them, that would likely serve to keep those contractors more budget-conscious (and more honest).
Answer choice (A): The basis by which a client agrees to take on one contract or another occurs long before the issue in the stimulus paradox, and therefore has no effect on the given situation.
Answer choice (B): This answer choice would not provide any assistance in straightening out the stimulus paradox, as it would affect each of the contract types equally.
Answer choice (C): Again, this answer choice would not provide any assistance in resolving the stimulus paradox, as it would affect each of the contract types equally.
Answer choice (D): This is the correct answer choice. This would provide a direct reason for the contractors in a fixed percentage contract to refrain from piling up costs beyond the initial estimates, as any such increases would spark a client review and potentially lead to trouble with that client. Note that it also takes into account the comparative nature of the stimulus, where we're not told that inflated billing doesn't occur in a fixed percentage contract, but that it occurs less commonly than in a fixed amount contract. This answer includes that comparative aspect, further supporting its resolving effect.
Answer choice (E): This would actually confuse the issue further, as it would make it more likely that contractors under fixed profit contracts would avoid cost overruns, since their original estimates were exaggerated. Some people get tripped up by this answer because they miss the idea that it involves initial estimates being inflated, rather than actual reported costs being inflated (which is what the paradox deals with). Be careful!
Resolve the Paradox. The correct answer choice is (D)
First, we're given two cost plus contract models: fixed percentage, where a contractor is paid as a set percent of costs, and fixed amount, where a contractor is paid a set amount above whatever costs are reported.
Since higher contractor costs would yield higher profits under a fixed percentage type of cost plus contract—since the amount paid is directly proportional to those costs—it would be reasonable to expect a contractor might inflate the costs in order to increase profits. That is, if I'm being paid X percent of whatever I spend (or claim to spend), I'm going to spend as much as possible (or claim to) to maximize my pay out!
However, the opposite is true: under these fixed percentage contracts it's less common to find final costs in excess of the original estimate than in a fixed amount model, meaning the artificial inflation ideas described above appears not to be happening. And therein lies your paradox!
So we need a reason why that might be the case. Hard to know exactly what it will be in advance—which is fine!—but one possible cause that comes to mind (for a lot of students, anyway) is a potential difference in oversight between the two types of contracts: if clients are far more attentive to costs when they know they'll be paying contractors based on them, that would likely serve to keep those contractors more budget-conscious (and more honest).
Answer choice (A): The basis by which a client agrees to take on one contract or another occurs long before the issue in the stimulus paradox, and therefore has no effect on the given situation.
Answer choice (B): This answer choice would not provide any assistance in straightening out the stimulus paradox, as it would affect each of the contract types equally.
Answer choice (C): Again, this answer choice would not provide any assistance in resolving the stimulus paradox, as it would affect each of the contract types equally.
Answer choice (D): This is the correct answer choice. This would provide a direct reason for the contractors in a fixed percentage contract to refrain from piling up costs beyond the initial estimates, as any such increases would spark a client review and potentially lead to trouble with that client. Note that it also takes into account the comparative nature of the stimulus, where we're not told that inflated billing doesn't occur in a fixed percentage contract, but that it occurs less commonly than in a fixed amount contract. This answer includes that comparative aspect, further supporting its resolving effect.
Answer choice (E): This would actually confuse the issue further, as it would make it more likely that contractors under fixed profit contracts would avoid cost overruns, since their original estimates were exaggerated. Some people get tripped up by this answer because they miss the idea that it involves initial estimates being inflated, rather than actual reported costs being inflated (which is what the paradox deals with). Be careful!
