Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
9th Edition
ISBN: 9781259290619
Author: Michael Baye, Jeff Prince
Publisher: McGraw-Hill Education
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Question
Chapter 6, Problem 18PAA
To determine
Reason for less interest of manager for increasing profit of the company.
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How can a manager earn profit by exploiting market inefficiencies? What are some common tactics?
Consider a firm that has two types of employees in their marketing department with the following compensation structures.
i. Sales staff that make "cold calls" to businesses to try and generate work for the firm. They are paid flat hourly wages and spend most of their time driving around to businesses to develop and curate those relationships.
ii. A marketing manager that earns an annual salary, whose responsibilities are to manage the sales staff and develop a strategic marketing plan, while at the same time they make commission on the work that they bring in for the firm themselves.
Based upon this description, for each type of employee identify a problem with the incenctives provided by the compensation schemes and the nature of their responsibilities. Then provide a potential solution for each, based upon our discussions of incentive design and moral hazard.
The owner of a thriving business wants to open a new office in a distant city. If he can hire someone who will manage the
new office honestly, he can afford to pay that person a weekly salary of $2,000 ($1,000 more than the manager would be
able to earn elsewhere) and still earn an economic profit of $800. The owner's concern is that he will not be able to
monitor the manager's behavior and that the manager would therefore be in a position to embezzle money from the
business. The owner knows that if the remote office is managed dishonestly, the manager can earn $4,500, which results
in an economic loss of $600 per week. (Hint. Construct a decision tree to help you answer the questions below.)
a. If the owner believes that all managers are narrowly self-interested income maximizers, will he open the new office?
Yes
No
b. Suppose the owner knows that a managerial candidate condemns dishonest behavior, and who would be willing to pay
up to $7,000 to avoid the guilt she would feel if she…
Chapter 6 Solutions
Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
Ch. 6 - Prob. 1CACQCh. 6 - Prob. 2CACQCh. 6 - Prob. 3CACQCh. 6 - Prob. 4CACQCh. 6 - Prob. 5CACQCh. 6 - Prob. 6CACQCh. 6 - Prob. 7CACQCh. 6 - Prob. 8CACQCh. 6 - Prob. 9CACQCh. 6 - Prob. 10CACQ
Ch. 6 - Prob. 11PAACh. 6 - DonutVille caters to its retirement population by...Ch. 6 - Prob. 13PAACh. 6 - Prob. 14PAACh. 6 - Prob. 15PAACh. 6 - Prob. 16PAACh. 6 - Prob. 17PAACh. 6 - Prob. 18PAACh. 6 - Prob. 19PAACh. 6 - Prob. 20PAACh. 6 - Prob. 21PAACh. 6 - Prob. 22PAACh. 6 - Prob. 23PAACh. 6 - Prob. 24PAACh. 6 - Prob. 25PAACh. 6 - Prob. 26PAACh. 6 - Prob. 27PAA
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