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After years of training, Sara has landed a contract playing professional lacrosse. Eager to increase her profile by bringing in endorsements, she asks Jenny MacGuire
After years of training, Sara has landed a contract playing professional lacrosse. Eager to increase her profile by bringing in endorsements, she asks Jenny MacGuire to be her personal manager. Jenny has offered Sara a choice of two payment plans: 1) Saracan engage Jenny's services for a flat fee of $120,000. 2) Alternatively, Sara can pay lenny 15% of all endorsement revenue. Sara estimates that if Jenny expends modest effort ($25,000 worth) in her job, she will generate $800,000 in endorsement revenue for Sara. But if Jenny expends high effort ($60,000 worth), she will bring in $1.2 million in endorsements. On the day Sara and Jenny are to sign their agreement, Jenny tells Sara:_\"l am 100% committed to your success. | will work as hard as possible, regardless of the payment plan you choose\". Sara has a choice of payment plans; Jenny has a choice of effort levels. a) Determine the relevant payouts for all possible outcomes, and draw the extensive form of the game (i.e. a decision tree) that Sara and Jenny are playing. (3 marks) b) Find the equilibrium outcome of this game. What payment plan wi'll Sara choose? What effort will Jenny expend? (2 marks) c) Explain briefly if Jenny's promise is believable. (2 marks) d) Discuss the implications of your findings from this exercise by referring to the principal -agent relationship in workplaces, that is, by considering whether workers should be given a fixed annual salary, versus 'piece-rate compensation' which is where workers are paid for each unit of output
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