Return to the Situation with the Manager from the Previous

question 26

Multiple Choice

Return to the situation with the manager from the previous question.Now assume that shareholders cannot observe effort,so cannot specify how hard the manager works in the contract but must induce it through the incentive scheme.Which of the following wage contracts would work out best for shareholders in equilibrium?

• A) A flat wage w = 2,500 with no profit share.
• B) A share of 35% of the gross profits.
• C) A share of 55% of the gross profits.
• D) A share of 70% of the gross profits.

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Definitions:

Business

An organization or enterprising entity engaged in commercial, industrial, or professional activities.

Household

A person or a group of people that share their income.

Factor Market

The marketplace where factors of production like labor, capital, and resources are bought and sold.

Hot Dogs

Cooked sausages, traditionally grilled or steamed, often served in a sliced bun as a fast-food.