2. A major issue in many areas of business decision-making is the principal-agent problem. One example is the ownermanager separation common in many firms

An alternative is for the owner to offer a salary component which varies with the success (profit) of the firm. The firm decides to pay the manager a fixed salary of 50,000 with an additional bonus of 1% of company profits. The expected relationship between the manager's daily work input and the firm's profits is as follows:

Manager's work input per day (hours) Firm's profit

0 0

1 1 million

2 2 million

3 3 million

4 4 million

5 5 million

6 6 million

7 7 million

8 8 million

(8 marks)