Suppose that the expected value of weekly profits for an ice cream shop, before paying the...

 

Transcribed Image Text:

Suppose that the expected value of weekly profits for an ice cream shop, before paying the manager, Amy, is E(x) = 500 + 7e, where e is Amy's weekly overtime hours. Amy is risk-neutral but incurs a cost C(e) = ? for working overtime. Thus, total expected surplus is E(S) = E(x) - C(e). Will Amy choose the surplus-maximizing level of effort if she pays the owner a fixed fee and keeps the residual profit from the shop? Alternatively, what happens if Amy earns a fixed wage and the owner gets the residual profit? If Amy pays the owner a fixed fee and then keeps the residual profit from the shop, then Amy's level of effort will be overtime hours, e, such that hours. (Enter your response rounded to one decimal place.) Suppose that the expected value of weekly profits for an ice cream shop, before paying the manager, Amy, is E(x) = 500 + 7e, where e is Amy's weekly overtime hours. Amy is risk-neutral but incurs a cost C(e) = ? for working overtime. Thus, total expected surplus is E(S) = E(x) - C(e). Will Amy choose the surplus-maximizing level of effort if she pays the owner a fixed fee and keeps the residual profit from the shop? Alternatively, what happens if Amy earns a fixed wage and the owner gets the residual profit? If Amy pays the owner a fixed fee and then keeps the residual profit from the shop, then Amy's level of effort will be overtime hours, e, such that hours. (Enter your response rounded to one decimal place.)