Concept explainers
(a)
The expected utility if shareholder offered to share half of the store’s revenue and the lowest share one would accept to manage the firm.
(a)
Explanation of Solution
Given the utility function,
If a shareholder’s share is 50% of the gross profit with C, then expected utility can be derive by inserting the value of the half of gross profit in C’s utility function, we have
Yes, C will accept when shareholder offered to share half of the store revenue with her.
The lowest value C would accept is
(b)
The most C would pay to buy out the store if shareholders decided to sell it off.
(b)
Explanation of Solution
The maximum amount she is willing to pay to buy is $700.
(c)
The fixed salary she would accept instead of $100 bonus.
(c)
Explanation of Solution
Let fixed salary be M
(d)
The lowest share that would induce her to exert effort.
(d)
Explanation of Solution
- Let the required share be K
One must have
Therefore, the lowest share that she would induce her to exert effort is
- Maximum expected profit along with fixed salary and bonus.
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Chapter 18 Solutions
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