ECN510 – The Principal-Agent Problem: You are hired as a management

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ECN510 Homework for Week 6
Logistics: Homework Discussion Leadership Plan
If your team is
assigned to lead the Homework discussion in-class (refer to
TeamForm(4)Completed.doc located under CourseOutline/Homework): then the Team
Leader should:

Email me to schedule a conference call or meeting place to go
over the homework submitted. Your HW and Discussion Leadership Plan must
be submitted prior to our scheduled time
Call or meet me on the scheduled time to discuss HW and
Discussion Leadership plan. Also, team leader should update other members
Set-up 15 minutes before the class and start leading the
discussion at the start of the class. All members are responsible for the
quality of presentation
Present clearly in order to earn full points.

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Refer to Chapter 6 (Baye)
The Principal-Agent Problem: You are hired
as a management consultant to provide recommendations on how to stimulate
productivity of the manufacturing firm that produces Printer Cartridges. Your 50%
of the variable salary (consulting fee) is directly tied with manufacturing
firm’s productivity and employees’ turnover ratio. You will be paid 25% of the
variable salary by the end of this current year, and the remaining balance will
be paid in the following year. How would you design a specific customized
compensation plan for Agent-Principal (owners, managers, and employees) that
would address both increased productivity and decreased turnover? And how would
you measure productivity?

Refer
to the Example in Chapter 3: Optimal Advertising Expenditures: An Example of Constrained
Maximization (T&M)
The next 3 questions refer to
the following:
A manager in charge of new product development can hire engineers and market
researchers. The annual salary of an engineer is $40,000 while a market
researcher receives $20,000. The marginal contribution of engineers and
market researchers are:
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1.
How should a manager with an annual budget of $140,000 allocate
this budget in order to maximize the number of new products developed?

2.
If the manager has an annual budget of $140,000 and currently is
hiring two engineers and three market researchers, then.

3.
How should a manager with an annual budget of $240,000 allocate
this budget in order to maximize the number of new products developed?

Refer
to Chapter 3 (T&M)
The next 2 questions refer to
the following:
A student taking economics, statistics, and finance has decided to spend 9
hours per week studying. The objective is to maximize the average grade, which
means maximizing the total grade in the three courses. The table shows the
student’s estimate of the relation between time spent studying each course and
the grade for each course.
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1.
How should the student allocate her time?

2.
What is the maximum AVERAGE grade the student can earn if she
studies 9 hours per week?

The next 3 questions refer to
the following:
An agency is
having problems with personal phone calls made during working hours. Each minute of a personal call costs the
agency $0.50 in wasted wages. The agency
decides to hire operators to monitor calls in order to attain the optimal
number of personal calls (minimize total cost of personal calls).

Number of Operators

Total minutes of personal
calls (per hour)

0

600

1

480

2

410

3

370

4

350

If operators receive $25 an hour, how many operators should the
agency hire?

a. 0
b. 1
c. 2
d.3
e.4

If operators receive $25 an hour, what is the minimum possible
total cost of personal calls (per hour)?

a.$460
b.$255
c.$120
d.$ 85
e.none
of the above

What is the most
the agency would be willing to pay the first operator?

a.$480
b.$300
c.$240
d.$120
e.none of the above