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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Chapter 6, Problem 6CACQ
To determine
The type of compensation scheme preferred by a manager is to be ascertained.
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Sandra lives in Melbourne and runs a business that sells guitars. In an average year, she receives $2.6 millionfrom sales of guitars. Of this sales revenue, she must pay the manufacturer a wholesale cost of $1,400,000. She also pays wages and utility bills totalling $1,100,000. If she does not operate this guitar business, she can work in an accounting firm and receive an annual salary of $70,000. She owns her showroom. If she chooses to rent it out, she will receive $50,000 in rent per year. Assume that the value of this showroom does not depreciate during the year. No other costs are incurred in running this guitar business. What is Sandra’s accounting profit (used for tax purposes)? What is her economic profit?
Consider the following example:
Jordan currently works for a corporate law firm. She is considering opening her own independent legal practice, where she expects to earn
$300,000 per year once she gets established. To run her own firm, she willI have to give up her current job with a salary of $165,000 and will incur
the following annual expenses:
Rent
22,490
Salary-Legal Assistant
Computer Software License
Office Supplies
21,830
120
800
Internet Subscription
1,750
How much are Jordan's explicit costs?
Number
How much is Jordan's accounting profit? Number
How much are Jordan's implicit costs? Number
How much is Jordan's economic profit? Number
Assume Jordan values her leisure time at $80/hour, and starting her own firm would require her to put in 15 more hours than at the corporate firm:
What is the change in Jordan's explicit costs? Number
What is the change in Jordan's implicit costs? Number
`Question:
Feng is the owner of a small business. When Feng has worked hard (an) during the year, net income before manager compensation has been $1,600 for 60 percent of the time and $400 for 40 percent of the time.
More recently, Feng has been ill and has had to shirk (az). Net income has been $1,600 only 30 percent of the time and $400 for 70 percent of the time. Feng realizes that he must hire a manager for one year while he devotes full time to his recovery. Feng is risk-neutral, with utility equal to the amount of net income for the year after manager compensation. Feng is negotiating with Shui for the manager job. He ascertains that Shui is risk-averse, with utility equal to the square root of the dollar compensation received. Shui is willing to work for Feng providing she receives expected utility of at least 6. Shui advises Feng that she is effort-averse, with disutility of effort of 3 if she works hard, and 2 if she does not work hard.
Required
a. Feng suggests a salary of…
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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