Now suppose that the owner of Topside Tiles in the previous question changes the manager’s compensation to a fixed share (15%) of profit: Y = 0.15π. The situation is otherwise the same as in Question 3.6. Are the interests of the owner and manager aligned or in conflict? Is there an agency problem in this case?

Question 3.6

Topside Tiles, which produces roofing tiles, is a local monopoly. Its inverse demand function is p = 50 - 2Q, and its constant marginal cost is 10. The owner has delegated the decision of how much output to produce to the plant manager. The manager’s income, Y, is 10% of revenue: Y = 0.1R. Show that a manager who wishes to maximize income, Y, will choose an output that exceeds the profit-maximizing level. Is there a conflict of interest between the owner and manager? Is this situation an agency problem?