Mr. Smith recently faced a choice between being (a) an economics professor, which pays $60,000/ yr, or (b) a safari leader, which pays $50,000/ yr. After careful deliberation, Smith took the safari job, but it was a close call. “For a dollar more,” he said, I’d have gone the other way.” Now Smith’s brother- in- law approaches him with a business proposition. The terms are as follows:
• Smith must resign his safari job to work full- time in his brother-in-law’s business.
• Smith must give his brother- in- law an interest- free loan of $100,000, which will be repaid in full if and when Smith leaves the business. (Smith currently has much more than $100,000 in the bank.)
• The business will pay Smith a salary of $70,000/yr. He will receive no other payment from the business. The interest rate is 10 percent per year. Apart from salary considerations, Smith feels that working in the business would be just as enjoyable as being an economics professor. For simplicity, assume there is no uncertainty regarding either Smith’s salary in the proposed business or the security of his monetary investment in it. Should Smith join his brother- in- law and, if so, how small would Smith’s salary from the business have to be to make it not worthwhile for him to join? If not, how large would Smith’s salary from the business have to be to make it worthwhile for him to join?

  • CreatedDecember 12, 2014
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