Question

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 Cle) = 2 for working overtime. Thus, total expected surplus is E(S)=E(1)-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 e- hours. (Enter your response rounded to one decimal place.)

Answer 1

Yer Aroo the she resicua entralonintim the eand ar enacerue to her (frota) 4Ahe i kupina the hosidual Mail not hoc uel fet she memagin Aulus manimng the ane to she uill pain amount E(s) EC)-Cle) Cce)- et ECn) 500+7e E(S) S00 7e- e d E(s) 7-M 20 de dEG) = 0 de 7-2e=O 7-2e e 3.s 3. Ronel

Let me know if anything is unclear :)