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 $3,100, which results in an economic loss of $600 per week. (LO3)

a. If the owner believes that all managers are narrowly self-interested income maximizers, will he open the new office?

b. Suppose the owner knows that a managerial candidate is a genuinely honest person who condemns dishonest behavior and who would be willing to pay up to $15,000 to avoid the guilt she would feel if she were dishonest. Will the owner open the remote office?