A manager has a utility function U = C ^0.5 if she doesn't work hard and U = C ^0.5 - 1 if she does.Expected profit will increase from 1,400 to 1,600 if she works hard.The manager receives compensation C equal to 82 plus a portion x of any profit in excess of 1,400.What is the value of x that will make the manager indifferent between shirking and working hard? A) 0.095. B) 0.105. C) 0.19. D) 0.242. E) None of the above.

Question

Quizplus · Accepted Answer

To make the manager indifferent, set the utility of working hard equal to the utility of not working hard: (82 + x*200)^0.5 - 1 = 82^0.5. Solving for x gives x = 0.095.

A Manager Has a Utility Function U = C 0

A Manager Has a Utility Function U = C ⁰