Jane owns a small restaurant in the heart of Toronto. She wants to hire Jim to...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Jane owns a small restaurant in the heart of Toronto. She wants to hire Jim to X manage the restaurant. Jim has zero wealth. Both Jane and Jim are risk-neutral (i.e., their expected utility equals the expected payoff). The monthly revenue from Jane's restaurant will depend on Jim's effort and the state of economy as follows: Strong Economy Weak Economy (Probability=0.7) | (Probability=0.3) High effort (a = 1) Low effort (a 0) = 23,500 15,600 18,300 10,400 Jane cannot observe Jim's effort, but she knows that his cost of exerting effort is given by C(a) = 1, 500a. Jane wants to offer Jim the following pure revenue-sharing contract: Jim receives the shares of the realized revenue (s = 0.5, for example, means Jim gets 50% of the revenue), but no fixed payment. (a) (3 points) Which level of effort (i.e., high or low) would Jim choose when s = 0? Explain. (b) (5 points) What is Jane's expected utility when s = 0? (c) (10 points) What is the minimum revenue share that Jane has to offer to Jim to ensure that Jim exerts high effort? (d) (5 points) What is Jane's expected utility at this minimum revenue share? (e) (4 points) Is it optimal for Jane to offer s = 0 or the minimum revenue share you found in part (c)? (f) (6 points) How would your answer to part (c) change if Jim was risk averse? Please provide an intuitive answer, without any calculations. Jane owns a small restaurant in the heart of Toronto. She wants to hire Jim to X manage the restaurant. Jim has zero wealth. Both Jane and Jim are risk-neutral (i.e., their expected utility equals the expected payoff). The monthly revenue from Jane's restaurant will depend on Jim's effort and the state of economy as follows: Strong Economy Weak Economy (Probability=0.7) | (Probability=0.3) High effort (a = 1) Low effort (a 0) = 23,500 15,600 18,300 10,400 Jane cannot observe Jim's effort, but she knows that his cost of exerting effort is given by C(a) = 1, 500a. Jane wants to offer Jim the following pure revenue-sharing contract: Jim receives the shares of the realized revenue (s = 0.5, for example, means Jim gets 50% of the revenue), but no fixed payment. (a) (3 points) Which level of effort (i.e., high or low) would Jim choose when s = 0? Explain. (b) (5 points) What is Jane's expected utility when s = 0? (c) (10 points) What is the minimum revenue share that Jane has to offer to Jim to ensure that Jim exerts high effort? (d) (5 points) What is Jane's expected utility at this minimum revenue share? (e) (4 points) Is it optimal for Jane to offer s = 0 or the minimum revenue share you found in part (c)? (f) (6 points) How would your answer to part (c) change if Jim was risk averse? Please provide an intuitive answer, without any calculations.
Expert Answer:
Related Book For
Fundamental Managerial Accounting Concepts
ISBN: 978-0078025655
7th edition
Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Old
Posted Date:
Students also viewed these finance questions
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Question B3 [2 points]. Examine, analytically and graphically in a diagramme drawn in the PD-z space, the effects of the increase in i*, and show that in the new equilibrium domestic prices can be...
-
What is the value of the program counter in the machine described in Appendix C immediately after executing the instruction B0CD?
-
For each Quadrant, I - IV, shown at right, identify whether the values of cosθ and sinθ are positive or negative. Quadrant II Quadraat I uad IV
-
The account balances of Tompkins Towing Service, Inc., at June 30, 2012, follow: Requirements 1. Prepare the balance sheet of the business at June 30, 2012. 2. What does the balance sheet...
-
Christie Realty loaned money and received the following notes during 2012. Requirements For each note, compute interest using a 360-day year. Explanations are not required. 1. Determine the due date...
-
Find 3 online resources on/for networking. Summarize each resource and include the link. Include an example of how each resource will assist you in your career search as a Human Resources graduate
-
You just began a position as a financial accountant at Peyton Approved. In this role, your first task is to prepare the companys financials for the year-end audit. Additionally, the company is...
-
A firm is expecting to grow at a constant rate of 5.25%. To do so, it will need to raise additional capital, including debt capital. Currently their $1,000 face value bonds that mature in ten years...
-
Many times, performance management systems are linked to compensation. List three reasons why they should be linked and three reasons why they shouldn't be linked. As an employee, which do you...
-
I think the public can contribute to creating performance-based budgets, but how much they can participate depends on the government's structure and rules. Citizen involvement can greatly impact...
-
The following unadjusted trial balance is prepared at fiscal year - end for Nelson Company. Nelson Company uses a perpetual inventory system. It categorizes the following accounts as selling...
-
Find an expression for ||+||2 + ||uv||2 in terms of ||||2 + ||||.
-
Project A requires an original investment of $53,100. The project will yield cash flows of $14,600 per year for 4 years. Project B has a computed net present value of $2,980 over a 4-year life....
-
Q.4 Suppose we have the following student table in database. You have to write: Form load event to show all records in grid view when you run the application Event handler for "Semester 6th Student"...
-
Parkin Industries, a U.S. company, acquired a wholly-owned subsidiary, located in Italy, at the beginning of the current year, for 200,000. The subsidiary's functional currency is the euro. The...
-
Austen Ren owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Ren...
-
Cruger Bike Company (CBC) makes the frames used to build its bicycles. During 2014, CBC made 20,000 frames; the costs incurred follow. Unit-level materials costs (20,000 units x $30) ....... $...
-
Matthew Nixon, president of Nixon Door Products Company, is evaluating the performance of Alex White, the plant manager, for the last fiscal year. Mr. Nixon is concerned that production costs...
-
Consider again the system of Figure 2.57, reproduced in Figure 5.32. Derive the equation of motion using (a) Lagrange's equation, and (b) Hamilton's principle, for generalized coordinate \(x\). eeeee...
-
Consider again the system of Figure 2.53, reproduced in Figure 5.30. A mass \(m\) is suspended by a pulley system with a spring. Derive the equation of motion of the system using (a) Lagrange's...
-
Consider again the system of Figure 2.54, reproduced in Figure 5.31. Derive the equation of motion of the system using (a) Lagrange's equation, and (b) Hamilton's principle, for generalized...
Study smarter with the SolutionInn App