Managerial Economics & Business Strategy 7th Edition by Michael Baye, Stanley Brue, David MacPherson

Exercise 6

Describe how a manager who derives satisfaction from both income and shirking allocates a 10-hour day between these activities when paid an annual, fixed salary of $125,000. When this same manager is given an annual, fixed salary of $125,000 and 3 percent of the firm's profits-amounting to $150,000 per year-the manager chooses to work seven hours and shirks for three hours. Explain which of the compensation schemes the manager prefers.