A Risk-Averse Manager Is Hired to Run a Firm for Shareholders

question 6

Multiple Choice

A risk-averse manager is hired to run a firm for shareholders. If shareholders cannot observe the manager's effort,which would be the best employment contract?

• A)a high-powered incentive contract to elicit maximum effort.
• B)a fixed salary.
• C)a moderately powered incentive scheme that elicits some effort without exposing the manager to too much risk.
• D)an incentive scheme that provides maximum incentives and maximum insurance.

Evaluate the financial implications of dropping a product or segment based on relevant costs and benefits.

Calculate the target costing for new products based on desired return on investment.

Assess the effect of special orders on net operating income, including considerations of variable costs, fixed costs, and capacity.

Determine the financial impact of accepting a special order by considering modification costs and potential benefits.

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Definitions:

Producer Surplus

The difference between what producers are willing to sell a product for and the actual price they receive, representing their benefit or surplus.

Minimum Acceptable Price

The lowest price at which a seller is willing to sell a product or service.

Consumer Surplus

The gap between what consumers are ready and able to shell out for a good or service and what they indeed spend on it.

Equilibrium Point

An equilibrium in the market where demand meets supply, causing price levels to remain unchanged.