Question
Topside Tiles, which produces roofing tiles, is a local monopoly. Its inverse demand function is p = 140-20, and its constant marginal cost is 10.
Topside Tiles, which produces roofing tiles, is a local monopoly. Its inverse demand function is p = 140-20, and its constant marginal cost is 10. The owner has delegated the decision of how much output to produce to the plant manager. The manager's income, Y, is 5% of revenue: Y = 0.05R. Show that a manager who wishes to maximize income, Y, will choose an output that exceeds the profit-maximizing level. Is there a conflict of interest between the owner and manager? Is this situation an agency problem? (Hint: This problem can be solved using a graph, by using calculus, or by using the rule that the MR curve has twice the slope of the demand curve.) The output that maximizes profit is Q units. (Enter your response rounded to one decimal place.)
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