The bonus of a plant manager in a vertically integrated firm is based on the following formula: Bonus = 10,000 - 0.5(Q_f - Q) Where Q_f is feasible production and Q is actual production. The value for Q_f is provided by the plant manager at the beginning of the year. With this scheme, the plant manager has an incentive: A) to underestimate Q_f. B) to overestimate Q_f. C) to reveal the true Q_f and make Q as small as possible. D) to reveal the true Q_f and make Q as large as possible.

Question

Quizplus · Accepted Answer

The bonus formula is designed in such a way that the smaller the difference between the feasible production (Q_f) and the actual production (Q), the higher the bonus. By underestimating the feasible production, the plant manager can make it easier to achieve or exceed this target, thus maximizing their bonus.

The Bonus of a Plant Manager in a Vertically Integrated