1. Recently,theownerofaTraderJoe'sfranchisedecided tochangehowshecompensated her top manager. Last year,shepaid him afixedsalary of $65,000, and her store made $120,000in profits(notcounting payment tohertopmanager).Shesuspected thestore could do much betterand feared thefixed salary wascausing her top manager toshirk on thejob.Therefore, this yearshedecided tooffer him afixed salary of $30,000 plus 15 percentof thestore's profits.Since thechange, thestore isperformingmuch better, and she forecasts profits this year to be$280,000 (again, notcounting the payment to hertopmanager).Assuming thechangeincompensation isthereasonfortheincreased profits, and that theforecast is accurate,

(a) Which compensation method (the old one or the new one) will the manager prefer? Please explain why.

(b) Which compensation method (the old one or the new one) would the owner of the franchise prefer? Please explain why.

(c) If there was another compensation pack offered where the worker would get a flat salary of $30,000 and 10 percent of the profits (expected profits are still $280,000), would the worker prefer this offer or would the worker prefer getting a flat salary of $65,000? Please explain why.

2. Professional athletes in MLB and NBA often have fully guaranteed contracts, which means that they will be paid the full value of their contract even if they are injured and cannot play in all the games, or even if their performance is not as good as was expected. What incentive do such players have to perform at the highest level? Please give an explanation.

3. Is there a principal agent problem when school teachers are hired by a local school (will the goals of the school be the same as the goals of the teachers)? Please explain.