Microeconomics (13th Edition)
13th Edition
ISBN: 9780134744476
Author: Michael Parkin
Publisher: PEARSON
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Chapter 10, Problem 23APA
To determine
Coping with the principal-agent problem.
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Feng is the owner of a small business. When Feng has worked hard (an) during the year, net income before manager compensation has been $1,600 for 60 percent of the time and $400 for 40 percent of the time.
More recently, Feng has been ill and has had to shirk (az). Net income has been $1,600 only 30 percent of the time and $400 for 70 percent of the time. Feng realizes that he must hire a manager for one year while he devotes full time to his recovery. Feng is risk-neutral, with utility equal to the amount of net income for the year after manager compensation. Feng is negotiating with Shui for the manager job. He ascertains that Shui is risk-averse, with utility equal to the square root of the dollar compensation received. Shui is willing to work for Feng providing she receives expected utility of at least 6. Shui advises Feng that she is effort-averse, with disutility of effort of 3 if she works hard, and 2 if she does not work hard.
Required
a. Feng suggests a salary of…
You are the Director of HR. The board of directors have asked your opinion about the compensation they plan to offer their candidate for the CEO position. You think the basic salary with incentives is extraordinarly high. Use the Equity Theory to explain how the employees are likely to interpret the high pay of CEOs.
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Chapter 10 Solutions
Microeconomics (13th Edition)
Ch. 10.1 - Prob. 1RQCh. 10.1 - Prob. 2RQCh. 10.1 - Prob. 3RQCh. 10.1 - Prob. 4RQCh. 10.1 - Prob. 5RQCh. 10.2 - Prob. 1RQCh. 10.2 - Prob. 2RQCh. 10.2 - Prob. 3RQCh. 10.2 - Prob. 4RQCh. 10.3 - Prob. 1RQ
Ch. 10.3 - Prob. 2RQCh. 10.3 - Prob. 3RQCh. 10.4 - Prob. 1RQCh. 10.4 - Prob. 2RQCh. 10.4 - Prob. 3RQCh. 10.4 - Prob. 4RQCh. 10.5 - Prob. 1RQCh. 10.5 - Prob. 2RQCh. 10.5 - Prob. 3RQCh. 10 - Prob. 1SPACh. 10 - Prob. 2SPACh. 10 - Prob. 3SPACh. 10 - Prob. 4SPACh. 10 - Prob. 5SPACh. 10 - Prob. 6SPACh. 10 - Prob. 7SPACh. 10 - Prob. 8APACh. 10 - Prob. 9APACh. 10 - Prob. 10APACh. 10 - Prob. 11APACh. 10 - Prob. 12APACh. 10 - Prob. 13APACh. 10 - Prob. 14APACh. 10 - Prob. 15APACh. 10 - Prob. 16APACh. 10 - Prob. 17APACh. 10 - Prob. 18APACh. 10 - Prob. 19APACh. 10 - Prob. 20APACh. 10 - Prob. 21APACh. 10 - Prob. 22APACh. 10 - Prob. 23APA
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