PRINCIPLES OF MICROECONOMICS LOOSE LEAF
12th Edition
ISBN: 9780134081083
Author: CASE
Publisher: PEARSON
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Question
Chapter 10, Problem 5.1P
(a)
To determine
The profit maximizing firm.
(b)
To determine
The action adopted by the firm to increase the profits.
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`Question:
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…
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PRINCIPLES OF MICROECONOMICS LOOSE LEAF
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