James' small business has grown and he is looking to hire you as a full-time manager....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
James' small business has grown and he is looking to hire you as a full-time manager. In the past, when James has worked hard at managing the business the net income before manager compensation was $300,000 85% of the time and only $135,000 15% of the time. The reverse is true when James has not worked hard (i.e., net income is $300,000 only 15% of the time and $135,000 85% of the time). James expects the same outcomes with the new manager as well. You are both risk and effort adverse, with your utility equal to the square root of your compensation. Your disutility for work is 120 if you work hard and 90 if you do not work hard (i.e., shirk). You also have a reservation utility of 160. James offers a salary of $60,000 plus 10% of net income for the year to you if you accept the manager position. Required a. Will you accept the job and will you work hard? (Show calculations) (3 marks) b. Now assume that after three years your contract term is up and James wants to renegotiate with you. He proposes a salary of $10,000 plus 25% of net income. Will you accept and will you work hard? (Show calculations) (4 marks) c. Assuming that you accept and work hard under the new contract proposed in b (that is not necessarily the correct response for b but please assume that for part c), is James' expected utility higher or lower as compared to under the original contract? James is risk neutral with the amount of profit after manager compensation is his utility. (Show calculations) (3 marks) James' small business has grown and he is looking to hire you as a full-time manager. In the past, when James has worked hard at managing the business the net income before manager compensation was $300,000 85% of the time and only $135,000 15% of the time. The reverse is true when James has not worked hard (i.e., net income is $300,000 only 15% of the time and $135,000 85% of the time). James expects the same outcomes with the new manager as well. You are both risk and effort adverse, with your utility equal to the square root of your compensation. Your disutility for work is 120 if you work hard and 90 if you do not work hard (i.e., shirk). You also have a reservation utility of 160. James offers a salary of $60,000 plus 10% of net income for the year to you if you accept the manager position. Required a. Will you accept the job and will you work hard? (Show calculations) (3 marks) b. Now assume that after three years your contract term is up and James wants to renegotiate with you. He proposes a salary of $10,000 plus 25% of net income. Will you accept and will you work hard? (Show calculations) (4 marks) c. Assuming that you accept and work hard under the new contract proposed in b (that is not necessarily the correct response for b but please assume that for part c), is James' expected utility higher or lower as compared to under the original contract? James is risk neutral with the amount of profit after manager compensation is his utility. (Show calculations) (3 marks)
Expert Answer:
Answer rating: 100% (QA)
To determine whether you will accept the job and work hard we can compare the expected utilities under different scenarios Lets start with the origina... View the full answer
Related Book For
Posted Date:
Students also viewed these accounting questions
-
Pierres small business has grown to the point where he plans to hire a full- time manager. Pierre, an architect, has little inclination and ability to manage a medium- sized, fast- growing business...
-
Arthur's small business has grown to the point where he plans to hire a full-time manager. Arthur, an architect, has little inclination and ab il ity to manage a medium-sized, fast-growing business...
-
Determine the tax basis of the business asset acquired in each of the following cases: a. Firm L paid $5,950 cash plus $416 sales tax plus a $500 installation charge for a satellite dish. b. TTP Inc....
-
Evaluate (ex / x dx as an infinite series?
-
Akasuki works for an investment firm in Japan and is managing two portfolios for two different clients: the Nakamura family and the Saito family. Both portfolios had the same holding period return...
-
A concern borrows \($50,000\) at an annual effective compound interest rate of 10%. The concern wishes to pay off the debt in 5 yr by making equal payments at the end of each year. How much will each...
-
Jaguar Land Rover Automotive PLC (JLR) is a maker of luxury autos based in Coventry, United Kingdom. JLR uses IFRS and has a fiscal yearend of March 31. You have been asked to use your knowledge of...
-
A spherical snowball is melting in such a way that its radius is decreasing at a rate of 0.1 cm/min. At what rate is the volume of the snowball decreasing when the radius is 8 cm. (Note the answer is...
-
1) Consider barium sulfate crystals in saturated aqueous solution with interfacial energy of 120 mJ/m? and Gibbs free energy barrier of 5.02x1019 J a. Show with calculations whether a nucleus with a...
-
Aaron, Deanne, and Keon formed the Blue Bell General Partnership at the beginning of the current year. Aaron and Deanne each contributed $122,000, and Keon transferred an acre of undeveloped land to...
-
Share-based compensation refers to a form of compensation provided by a company to its employees or executives in the form of equity instruments such as stock options, restricted stock units (RSUs),...
-
You are a chartered tax accountant working in Epping, NSW. A client by the name of Mr. Doolittle walked into your office for tax accounting advice concerning travel expenses and legal expenses he...
-
Sorenson Co. is considering the following alternative plans for financing the company: Plan 1 Plan 2 Issue 10% Bonds (at face) - $200,000 Issue $10 par Common Stock $300,000 $100,000 Income tax is...
-
In 2022 Albert is single and his AMT base is $123,250. This amount includes $5,000 of qualified dividends (the dividends were taxed at 15 percent in determining the regular tax liability). What is...
-
A team presentation on doing business in a country outside the United States, the focus is an in-depth understanding of another country, the business environment, and potential business...
-
Global.asax is used for: a. declare application variables O b. all other answers are wrong O c. declare global variables O d. handle application events
-
In a vapour compression refrigeration system, the condition of refrigerant before entering the compressor is (a) saturated liquid (b) wet vapour (c) dry saturated liquid (d) superheated vapour
-
During a refrigeration cycle, heat is rejected by the refrigerant in (a) compressor (b) condenser (c) evaporator (d) expansion valve
-
The highest temperature during the cycle in vapour compression refrigeration system occurs after (a) compression (b) condensation (c) expansion (d) evaporation
Study smarter with the SolutionInn App