Cindy has been hired to manage a furniture store and the owner of the store is t
ID: 1117244 • Letter: C
Question
Cindy has been hired to manage a furniture store and the owner of the store is trying to determine the appropriate contract to offer. The cost of Cindy's effort to manage 6. e store s o.le (where e-the number of hours per day worked) and the marginal cost to her is 0.2e. The gross profit of the store increases one-for-one in Cindy's effort, so the gross profit function is simply: GP-e. a. From th e owner's perspective, what is the optimal level of labor effort Cindy should contribute to managing the store? Design a high-powered incentive contract that gets Cindy to supply this level of effor . (ignore additional payments either to or by Cindy to get the manager's job-i.e. she Explain whether or not a high-powered incentive contract is feasible if the store's If the owner offers a moderate powered incentive contract where her marginal gets zero utility from her next best alternative activity). revenues are uncertain. pay=0.80/hour, how many hours per day will she work?Explanation / Answer
a) The total cost of effort to manage the store=0.1e^2. Also given the marginal cost to Cindy is 0.2e. To get optimal level of effort supply we equate the above two, that is, 0.1e^2=0.2e
i.e. 0.1e^2-0.2e=0
i.e. e(0.1e-0.2)=0
i.e. e=0 or e=2. So, the solution is e=2 hours.
d) Solving for this- 0.80=0.1e^2, i.e. 8=e^2 or e=2.828 hours